Investment Models used by HODLers to decide when to buy Bitcoin?

There is an enigma about Bitcoin. Not just because of its mysterious origin (by someone named Satoshi), but because it’s the first successful and now the leading implementation of the whole idea of having a decentralized currency.

As with everything else in the financial world, there is a difference between the price of something and the value of something.

The highest price that Bitcoin reached was in 2021 when the price of 1 Bitcoin (BTC) crossed $66,000. But the value of Bitcoin is something different. In fact, many people question whether Bitcoin has an intrinsic value or not. And if yes, then how to find it out?

So how to even think of the intrinsic value of something like Bitcoin which has no physical presence and exists only on computer networks?

It’s not easy to answer that.

Some approaches are based on the scarcity parameter that puts 21 Million limit on Bitcoin, i.e. that there is only a limited supply of Bitcoin (21 million ever to be produced by the year 2140). Others are based on other factors.

But still, over the years, few indicators (or as many call them investment models) are coming up which are used by long term Bitcoin holders or HODLers to decide when to buy Bitcoin.

Let’s see some of the popular ones:

2-Year Moving Average Multiplier – This model is used by those who are willing to hold Bitcoin for the long term. The model plots two lines, one is a simple 2-year Moving Average and the other is 5-times the 2y MA. As per the model, when Bitcoin is bought when its price falls below the 2-year moving average, it has generated high returns as per the historical data. On the other hand, when the BTC price moves above the other line, i.e. 5x2yMA, then it is said to be a good time to sell cryptos. The tool has been used by investors to understand whether BTC is overvalued or undervalued based on historical data.

Stock-to-Flow Model (S2F) – This model goes a bit technical but let me put it up simply here. The model shows an estimated price of Bitcoin based on the number of bitcoins available in the market relative to the amount being produced (mined) each year. The stock-to-flow model treats Bitcoin similar to commodities like gold, platinum, etc. as these are the so-called Store-Of-Value commodities due to their relative scarcity. The colored dots on the chart are reflective of the number of days to the next halving* event. When the price moves below the stock-to-flow level, it signifies undervaluation and when it goes above the S2F model, then it is entering the zone of overvaluation. The results of the model have been remarkably accurate in predicting Bitcoin’s prices till very recently. And if the model remains accurate in years to come, then seemingly, there is a lot (and I mean huge) upside to Bitcoin’s market cap. I strongly suggest you check out this model in your spare time.

*Bitcoin halving events are scheduled to happen roughly every 4 years.

Puell Multiple – This indicator is more about tracking the supply-side mining and revenue data. The Puell Multiple is calculated by dividing the daily issuance value of bitcoins (in US Dollars) by the 365-day moving average of the daily issuance value. The chart of Puell Multiple highlights two regions – one where the value of Bitcoin issued on a daily basis has historically been extremely low and the other where it has been extremely high. The returns have been high when investors purchase BTC when the Puell Multiple enters its lower value.

Pi Cycle Top Indicator – The Pi Cycle Top Indicator has historically been effective in picking out the timing of market cycle highs within 3 days. This model uses the 111-day moving average (111DMA) and another one 2x350DMA. As per the historical data, whenever 111DMA crosses the 2x350DMA on the upside, it sort of coincides with the peaking of the BTC price cycle then. But why call it Pi-Cycle? Because if you divide 350 by 111, you get about 3.15 which is pretty close to the value of Pi (3.14). I am sure to many this might look like trying to force-fit model into a data in a backward manner. But this is what it is and many people do tend to look at this indicator. I am not sure whether it really works or whether it might work in predicting future bitcoin peaks. So the Pi Cycle Top indicates when the BTC market is overvalued.

These are just a few of the models that are being used these days by hodlers to assess the valuations of Bitcoin. At times, smart crypto enthusiasts come up with different versions of crypto portfolios like the one linked here. But to be fair, there are quite a few challenges in valuing something like Bitcoin. Due to their structural nature and sort of non-physical presence, BTC cannot be valued easily using the popular, traditional valuation models. And till now, no one financial model has been able to reliably predict the behaviour of Bitcoin prices. Also, even if one can assess the fair value of Bitcoin or any other cryptocurrency, it still remains one of the most volatile trading or investment vehicles of at least the last few decades.

Time and again, I am asked how much should one invest in Bitcoin?

There is no one right answer here. But assuming it is legal to invest in cryptocurrencies where you reside, it is said that one can consider at least 1% exposure to Bitcoin and other cryptocurrencies. So if you have a portfolio of Rs 1 crore, then having 1% of it, i.e. Rs 1 lakh invested in cryptos is a good idea.

Not-So-Gentle Reminder – You shouldn’t invest in any cryptocurrency if you are still not properly handling important financial matters like having an emergency fund, paying off loans regularly, paying off credit cards in full each time, investing for financial goals, adequately funding your retirement plan, etc. Just because crypto is the new buzzword and everyone around you is talking about it, doesn’t mean you need to invest in it at all. Even before cryptos came into being in 2009, people were able to live their financial lives successfully.

With that comes the next question – of the amount that I want to invest in cryptocurrencies, how to split my cryptocurrency portfolio between Bitcoin, Ethereum, and other Altcoins?

Again, there is no one right answer here. And it’s okay to just have Bitcoin also. But this is what I think – For a portfolio with a major chunk in Bitcoin + Ethereum (like 70-80% or more), the basic idea is to capture consistent and long-term gains via the 2 main bets in Bitcoin and Ethereum. The altcoins on the other hand provide the potential for outsized gains (5x – 100x type returns) in the near-medium term.

But I must warn you, that do not invest too much in cryptocurrencies as this space is extremely volatile. And by volatile, I mean horribly volatile. If you look at the Bitcoin Price Crash History, you will find that the history is filled with reds. From small corrections to huge crashes. Up to 80% price correction in a matter of months! So even after more than 13 years into existence now, if you were to ask me whether it can once again fall that much, then I will say, Yes it can. When? Nobody can predict that. But the fact is that Bitcoin is known to be a highly volatile asset and you should handle it accordingly, even if you are prepared to hold it for the long term and are a HODLer.

Disclaimer – Investing in cryptocurrencies is highly risky and speculative. This article should not be considered a recommendation to invest in Bitcoin or any other cryptocurrencies.

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