The recent, brutal selloff in bitcoin has even the most ardent bulls puzzled about the outlook for the digital asset. Bitcoin has shed more than 20% of its value over the past week amid a raft of negative news, leaving investors scrambling for a reason to hold on to a modicum of optimism.
Tom Lee, managing partner at Fundstrat Global Advisors, thinks he has found a good life vest, and ironically, it is referred to as the Bitcoin Misery Index (BMI).
The BMI is a measure of consistency in the price of the No. 1 digital asset, bitcoinBTCUSD, +2.71% over the past 90 days, using the end of day performance (up-day or down-day) and volatility. In other words, it is a measure of momentum in the asset, equivalent to an “oversold-overbought” indicator. Market technicians often gauge “overbought” or “oversold” conditions based on measures of price momentum.
Thus far, the index has provided buy signals in times of a market downturn and vice versa.
“Like other sentiment indicators this is a contrarian indicator—the last times BMI was <27 was Sep 2011, Nov 2012, Jan 2015, Sep 2016—all proved to be excellent 12 month entry points for BTC,” Lee wrote in a research report. Historically, a reading above 67 has been a good sell signal, while a reading below 27 has proved to be a strong buy indicator.
Currently, at 18.8, the index is at its lowest level since Sept. 6, 2011. At that time, about seven years ago in September, the price of bitcoin was $6.86, according to news and research site CoinDesk. Over the following 12-months, the price rose to 60.3% to $11. However, during this period bitcoin’s value retreated to $2.05 on Nov. 18, which would mean investors would have had to run the position more than 70% out of the money.
Furthermore, Lee is a perennial bitcoin bull. His midyear target of $20,000 and year-end target of $25,000 are becoming less probable by the day.
The Fundstrat analyst makes the case based on his technical analysis that the recent selling pressure is flow driven, as opposed to representative of changing fundamentals at bitcoin. In other words, Lee believes that downward pressure is based on a handful of trades rather than a shift in investors’ perception about bitcoin or the cryptocurrency sector.
“The Mt Gox liquidations, in our view, are actually a short-term (but painful) overhang. The Trustee has some >40,000 BTC so far ($1.7B remaining)—and we believe is the largest ever liquidation of crypto to fiat (USD/JPY) ever,” Lee wrote. Mt. Gox refers to the $450 million cyberbreach of the now-defunct, digital-asset platform back in 2014.
Lee believes, once this liquidation has run its course, the proceeds will be reinvested into the cryptocurrency market. “Hence, those proceeds, when distributed will become fiat to crypto inflows.”
For now, the crypto bulls find themselves on the back foot. Bitcoin is on track for its fifth consecutive losing day and sixth weekly loss of 2018—a miserable run.