The volatile nature of bitcoin has helped the cryptocurrency cement epic gains since its founding in 2009, but not all investors have been able to hold on throughout its wild price swings.
Bitcoin has surged 67% year-to-date, even after experiencing a sell-off of 54% from peak in April. To better withstand the volatility of bitcoin, Fundstrat's Tom Lee has compiled the 5 must-follow rules for investors to keep at top of mind when investing in bitcoin.
These are the 5 must-follow rules when investing in bitcoin, according to Fundstrat's Tom Lee.
It's all about crypto adoption in America over the next few years, given that the country makes up a bulk of global wealth, according to Lee.
According to the Bitcoin Market Potential Index, the US is ranked fifth overall, and is the only major country in the top 10. If bitcoin is going to succeed, it needs to succeed in the US.
Lee highlighted that a massive wealth transfer from baby boomers to millennials will be worth nearly $70 trillion in the next 20 years. Some of this wealth transfer could flow into bitcoin given that millennials are more open to crypto than baby boomers.
Market sentiment and security prices go hand in hand, which is why its crucial crypto investors keep an eye on sentiment indicators for bitcoin. Rising sentiment in bitcoin has often correlated to strong forward six-month returns, where as falling sentiment is a sign that heightened volatility may soon return.
Every time bitcoin has crossed above its 200-day moving average, it has generated strong returns, with an average six-month forward return of 193% and a win ratio of 80%, according to Lee.
"The 200 day moving average is important, because it reflects the long-term trend in prices and is also essentially where most holders acquired their security," Lee explained.
Bitcoin crossed above its 200-day moving average earlier this month, and since then the cryptocurrency is up more than 8%.
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"Bitcoin performs best when the SP 500 is performing strongly," according to Lee. That means bitcoin is likely viewed as a risk-on asset by investors.
The biggest returns for bitcoin have come in strong years for equity market, giving the two asset classes a positive correlation.
"Does this mean bitcoin is a risk-on asset? Maybe. But we think the better explanation is bitcoin works best when there is a clear macro trend," Lee explained.
"The reason 'buy and hold' (or HODL) makes sense for bitcoin is that a handful of days each year account for the bulk of gains for bitcoin," Lee said.
Bitcoin was down, on average, every year if the top 10 daily percentage gains for the cryptocurrency are excluded, according to Fundstrat.
"Ex-top 10 days, bitcoin is down 44% annually between 2013 and 2019," Lee said. Given the difficulty in consistently timing the ins and outs of bitcoin, buy and hold is a better strategy, according to Lee.
Lee remains bullish on bitcoin, and believes the cryptocurrency could surge to $100,000 into year-end.