Original Title: Low Buying Strategy in a Bull Market

Original Author: Carrie | Chain Hill Capital

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Is it a bull market now?

First, let's answer the question, is Bitcoin in a bull market right now? If yes, what stage is the current bull market in? Before answering this question, let us clarify the basic logic of investing in Bitcoin.

1. Bitcoin is the best store of value.

Admittedly, since the history of Bitcoin is only 11 years, and its users are only more than 60 million, the consensus degree of Bitcoin as a store of value cannot be compared with that of gold. But by every other measure of a store of value, Bitcoin has an edge over gold:

• In terms of scarcity, Bitcoin is the only large tradable asset known in the world with a fixed supply cap.

• From the perspective of liquidity, Bitcoin is the only asset that can be traded globally 7*24;

• From the perspective of portability, compared to bulky gold, Bitcoin only needs a string of private keys and can be carried to any location.

Therefore, it is only a matter of time, when more and more investors realize these advantages of Bitcoin, it will eventually surpass the market size of gold. Like all innovative technologies, this process will be "gradually and then suddenly" (slow accumulation, instant dramatic change).

2. Bitcoin is in the early adoption phase.

From the perspective of the technology acceptance S-curve, Bitcoin is still in the "early adopter" stage at this stage. If it is held for a long time, early entrants can enjoy the huge dividends of the "mass" adoption stage. Also, while having better store-of-value properties, Bitcoin's market capitalization is currently 50 times smaller than gold. These mean that Bitcoin has huge potential for future growth.

3. The digital gold narrative is growing.

Unprecedented government intervention and easy monetary policy have brought unprecedented inflation expectations to the market, which is acting as a catalyst to accelerate the widespread adoption of Bitcoin. Stone Ridge ($10 billion AUM) bought $115 million in Bitcoin. Paul Tudor Jones (Paul Tudor Jones) publicly disclosed that he plans to invest 1%-2% of the assets of his hedge fund Tudor BVI (AUM22.2 billion) in Bitcoin. Several public pension funds in the United States have invested in Bitcoin through fund managers. In the third quarter of 2020, Grayscale, the largest digital asset trust fund, had an inflow of more than US$1 billion. In addition to the above traditional asset management companies, we have also seen a new trend, that is, traditional enterprises are using Bitcoin as a reserve asset. Nasdaq-listed company MicroStrategy invested 85% of its $500 million balance sheet ($425 million) in Bitcoin; financial technology company Square announced that it bought about $50 million in Bitcoin (about 1% of assets) ...we are seeing more and more mainstream adoption of the value of Bitcoin as a hedge against inflation. The ongoing zero interest rate environment and QE will continue to drive demand, and the trend is just beginning.

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Indicators on the chain show that the current supply and demand structure presents the characteristics of an early bull market

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Figure 1 Data source: Grayscale Investment. The gray line in the figure represents the proportion of long-term currency holders, the green line represents the proportion of speculators, and the blue line represents the bitcoin price

At present, the proportion of long-term currency holders in the market is constantly increasing, while the proportion of speculators is decreasing, which indicates that the market is in the accumulation stage.

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figure 2

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The bitcoin balance on exchanges (including spot and futures) has reached a new low in a year. Putting bitcoins in exchange wallets is often for liquidity, and the decline in exchange wallet balances also indicates a decline in market supply.

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The number of daily active addresses represents the growth of the network, and a spike in activity can indicate increased adoption and the start of a new market cycle.

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Figure 4

Giant whales (addresses holding more than 1,000 bitcoins) are considered to be smart funds in this market. They usually enter at the bottom of the market, and then hold coins for a long time to ambush the next round of bull market. The increasing number of giant whale addresses indicates market accumulation. Compared with the previous cycle, the current growth trend of giant whale addresses is very similar to that in 2016.

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Figure 5

Miner profitability indicators (Bitcoin price/miner cost) can be used as a reference for the bottom of the Bitcoin market cycle. Because long-term low or negative profit margins can clear out inefficient miners, this allows more efficient, well-capitalized miners to accumulate more bitcoins, thereby reducing the selling pressure of the miner group.

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Mayer multiple

The Mayer multiple is the ratio of the current Bitcoin price to the 200-day moving average. As a long-term indicator of oversold or overbought conditions, it can be used to measure whether the market is hot or cold. The higher the Mayer multiple, the hotter the market.

• The average Mayer multiple since 2012 is 1.32, with a median of 1.15

• During the bull run following the first halving (November 2012), the Maye multiple reached 6.66.

• During the bull run after the second halving (July 2016), the Mayer multiple reached 3.78.

• According to Trace Mayer, if the Mayer multiple is equal to or greater than 2.4, there may be a speculative bubble. On the contrary, if the Mayer multiple is lower than 2.4, it is suitable for opening positions

• The market is at the bottom of a large level when the Mayer multiple is below 0.60

• The Mayer multiple rebounded from the bottom and entered a bull market after breaking through 0.95

In June 2019, the Mayer multiple briefly exceeded 2.4, and then fell below 0.95 until February 2020, when it returned to a level above 0.95. However, affected by external factors in March, the upward trend of Bitcoin was interrupted, and the Mayer multiple once fell to close to 0.6. Due to the support of the fundamentals, the market quickly recovered from the bottom, and the Mayer multiple returned to above 0.95, and maintained a steady upward trend, currently at 1.27. Therefore, judging from the Mayer multiple, it is also in the early stage of the bull market.

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summary

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Buy the Dip Strategy

1. Magnitude and duration of pullbacks in bull markets

We can look for the law of price callbacks from two angles.

• The decline from the start of the retracement to the lowest point

• The time elapsed from the start of the retracement to the lowest point

Next, according to the bull market stages divided in Figure 6, we counted the corrections of more than 5% during these periods:

• 90% of the retracements are less than 35%, 60% are less than 20%, and 35% are less than 10%

• Figure 8

Figure 8

According to the law of the decline rate, a simple bargain-hunting rule is:

• When the pullback reaches 20%, it is a good time to buy

• When the pullback reaches 35%, it is an excellent time to buy

However, how to judge when a callback ends? Is the 10% drop the lowest point? Or will it continue to fall to 20%, 30%, or even more? Is it possible to find the pattern from the duration of the callback, and is the longer the callback, the greater the magnitude?

As can be seen from Figure 8, there is no obvious pattern in the duration of the callback (there is no significant relationship between time and decline). For example: a 41% retracement took 3 days, a 21% retracement took 44 days, and some 5% retracements took 10 days. The duration of the 10% to 20% pullback does not show obvious rules, and it may range from 1 day to 1 month.

In other words, it is difficult to predict when the callback will reach the bottom from the length of time, and accurately buy at the bottom.

Therefore, a more practical bargain-hunting strategy is to build positions in batches, rather than building positions at a time according to a fixed callback rate. For example, start buying from a 10% pullback and keep adding positions until a 35% pullback is reached.

2. When will the callback occur

Another question is, when will the callback usually be? In the early or late stages of a bull market?

By adding the Mayer multiple at the beginning of the callback, the following rules are found:

(1) In the early, middle, and late stages of the bull market, there are callback opportunities;

(2) The Mayer multiples are located in the intervals [1.15,1.35] and [1.63,1.83] with the most callbacks, 27% and 30% respectively;

(3) There is no significant relationship between the bull market stage and the magnitude of the correction.

Figure 9

Figure 9

3. Strategy Summary

To sum up, the strategy method of bargain hunting in the bull market proposed in this paper is summarized as follows:

(1) This strategy is suitable for the stage of opening positions in the bull market, that is, the Mayer multiple is in the [0.95-2.4] interval. The understanding of the [0.95-2.4] interval is that the Mayer multiple breaks through 0.95 from the bottom position as the starting point, and then maintains an upward trend until it reaches 2.4 as the end point.

(2) During the period defined in (1), positions can be opened in batches after a callback occurs:

• The callback reaches about 10%, and 1/3 of the position is opened;

• The callback reaches about 20%, and 1/3 of the position is opened;

• The callback reaches about 30%, and 1/3 of the position is opened;

Note: The specific opening ratio can be adjusted according to your own situation.

(3) Compared with the late bull market, the pullback in the early stage of the bull market is a better time to buy (can be judged by the size of the Mayer multiple). Combined with historical data, there are more and better buying opportunities when the Mayer multiple is in the [1.15,1.35] range;

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illustrate

Again, this article is not investment advice, this article is for reference and communication purposes only. Investors also need to combine their professional capabilities and information acquisition capabilities to formulate investment strategies that are in line with their own actual conditions.

Supported by a professional team with multicultural backgrounds, members of the core departments - Investment Research Department, Trading Department, and Risk Control Department are all from well-known universities and institutions at home and abroad. They have a solid financial background, excellent investment research capabilities, and a keen sense of the market Sensitive ability, highly awe of the market and risks. The Investment Research Department combines rigorous basic research with mathematical and statistical models to obtain investment strategies such as "Pure Alpha" and "Smart Beta", and will soon export institutional-level research reports and project due diligence reports.

About Chain Hill Capital

Since its establishment in 2017, Chain Hill Capital (Qianfeng Capital) has focused on the value investment of global blockchain projects. It has created early-stage and growth-stage equity investments and encrypted digital asset investment matrices of Alpha Strategy and Beta Strategy. Global resource relationship network, strategic layout of Chicago, New York, Tokyo, Beijing, Shanghai, Shenzhen, Hong Kong, Xiamen and other city nodes. With a wealth of overseas investment institutions and a global high-quality project resource pool, it is an international blockchain venture capital fund.

Supported by a professional team with multicultural backgrounds, members of the core departments - Investment Research Department, Trading Department, and Risk Control Department are all from well-known universities and institutions at home and abroad. They have a solid financial background, excellent investment research capabilities, and a keen sense of the market Sensitive ability, highly awe of the market and risks. The Investment Research Department combines rigorous basic research with mathematical and statistical models to obtain investment strategies such as "Pure Alpha" and "Smart Beta", and will soon export institutional-level research reports and project due diligence reports.