Bitcoin: Buying More Into Weakness?

2022年1月9日

Bitcoin has taken out both key supports at 45K and 42K over the previous week. This confirms BEARISH momentum and suggests price will continue into the next support between 38 and 40K over the coming week. What about the 40K whole number? Isn't that a good place to buy? In this article I am going to talk about dollar cost averaging and why this is a good time vs. putting on swing trades.

When 42K was first tested weeks ago, I wrote an article here about "wholesale prices". What this refers to is the idea of managing a Bitcoin investment like inventory for a store. You buy wholesale and sell retail. When prices are cheap it is a good time to accumulate inventory, right? Unlike inventory for a store, Bitcoin prices are constantly fluctuating, which means you need to be able to recognize when there is wholesale value, and most importantly how to MANAGE THE RISK if prices get cheaper after you make your purchases.

This is the process of dollar cost averaging. You may hear this phrase used a lot, especially among those who like to overcompensate for their lack of knowledge and experience. I have described this process for Bitcoin numerous times in my public streams. You figure out how much you want to buy (do NOT use leverage), then split that into smaller "batches", and then make sure to purchase once or twice per month. If prices are at unattractive levels (60K) then you skew your size smaller, if prices are at more attractive levels (40K) you skew larger. For example, you intend to invest 5K, you can split that into ten $500 purchases over the next 5 to 10 months based on how frequently you want to accumulate. Since Bitcoin is at relatively low prices and likely going lower, it makes sense to perhaps buy 750 worth, or maybe 1000 worth for each purchase (you are buying more when its cheaper).

What happens if Bitcoin goes to 30K from here? This is where strategic SIZING offers some protection. Since you have spread out your purchases over time and not all in from one price, dramatically lower prices become an even more attractive buying opportunity. You also have the choice of WAITING for some more stability in the market and do not have to make your scheduled purchase. By not having ALL of your investment in the market, you do not experience as much pain which makes you a STRONG HAND in contrast to your peers who got too big too fast at 60K because they consume too much hype.

Once you are all in, (which should take a number of months), you will have an average price AND your risk will be defined by what ever your total amount is. If you invested 5K, and Bitcoin goes to 0, you lose 5K. Of course you have to strongly believe in Bitcoin and that it will eventually go back to "retail" prices where you can then take portions of profit.

If you haven't purchased any inventory yet in Bitcoin, NOW is a good time, even though prices are poised to continue lower over the near term. The 38 to 40K area is a historical inflection point which means there is a greater chance that buying activity can appear and establish a reversal. Buying a batch that is skewed larger makes sense at current levels, and this will be the case even if Bitcoin continues to sell to 20K over the next few months (hard to believe BUT ANYTHING is possible).

Accumulating small portions over time and at lower prices is more practical than putting on a swing trade because of the price structure, momentum and greater risk. Swing trades are usually larger in size, often use leverage and require a strategically placed stop loss order. The problem in this environment is buying into long signals goes against the short term bearish price structure (lower highs, lower lows). While I still consider this move a correction of a broader bullish structure, the current momentum carries more weight (I don't short Bitcoin). Buy signals in this environment are highly likely to fake out or not follow through. We saw 3 signals in December and all 3 stopped out. So until the price structure proves to be more bullish, buy signals will be considered very aggressive.

Let price structure and levels shape your assessment, NOT PEOPLE. How many "gurus" were calling for Bitcoin 85K in December??? Everyone is a genius in a bull market. Think in terms of RISK NOT REWARD. In the U.S., the Federal Reserve is about to begin an interest rate hike and policy tightening cycle which we have not seen in YEARS. Usually in such an environment, speculative assets such as growth stocks do not perform well. And Bitcoin (and the alts) are far from value stock equivalents. Something to think about.

Thank you for considering my analysis and perspective. I hope you find it helpful.