Many Bitcoin fans will tell you that you can buy Bitcoin at any time.
We all want to get more Bitcoin with limited investment, so when is the right time to buy?
Many Bitcoin diehards will tell you that you can buy Bitcoin at any time. This is both true and false.
This is correct because, on a larger time scale, buying Bitcoin at any time can bring huge returns. For example, the peak of the last bull market was 8,000 yuan, which may have trapped a group of people, but as long as they hold it today, they will still make N times the profit.
This is incorrect because the amount of funds of each coin hoarder is limited. This means that if you control it well, you can get several times more coins. For example, if you reduce the average cost to 2,000 yuan through fixed investment, then your coin amount will be 4 times that of the high point. Then, according to our previous calculation, you can achieve wealth freedom one cycle (4 years) in advance, which is obviously also very important.
I hope that all coin hoarders can hold coins at the lowest cost. Why? Coin hoarders are hard players in the market, they only buy but never sell. Of course, I hope that more coins will be concentrated in the hands of hard players, and I don’t want those who speculate to get too many coins, because it’s meaningless for them to get them, and they will spit them out sooner or later.
So, the question is, how do we determine the right time to buy?
Li Xiaolai proposed in "A Concise Survival Guide in the Bitcoin World":
In the long run, I think the cost of miners can be regarded as a fundamental factor.
However, he never explained why, so many people did not agree with his point of view.
I think this statement makes sense. The lowest point of the coin price in the last bear market was 900 yuan. At that time, Wu Jihan revealed in an interview that the marginal cost of producing a coin was 800 yuan. This actually indirectly supports Li Xiaolai's point of view.
Let’s first look at the growth in difficulty of Bitcoin (Figure 1). Although the price of Bitcoin has fluctuated greatly, the difficulty has basically not experienced a pullback, but has instead been rising in one direction.
[Bitcoin Hoarding] 9. Advanced: Finding the Right Time to Buy
Figure 1. Bitcoin mining difficulty growth (data source: btc.com)
This shows that the price of Bitcoin has never fallen below the electricity cost of the mainstream mining machines at the time, otherwise there would be a large-scale shutdown phenomenon, the computing power would decrease, and the difficulty of mining would decrease. Therefore, the electricity cost is a hard support for the price of Bitcoin, and this view, at least in history, is valid.
However, this phenomenon is not rational in economics, because prices are determined by demand and have nothing to do with costs. When theory and facts contradict each other, we need to revise the theory. Here is my personal explanation.
The special thing about Bitcoin is that anyone, including you and me, will consider its production cost when preparing to hold Bitcoin. Because everyone has two ways to get Bitcoin: buying coins and mining. If you can get Bitcoin at a cost of $5,000 through mining, you won't buy it for $6,000.
In this respect, Bitcoin is fundamentally different from other commodities. If you want to buy an iPhone or a bottle of wine, you are mainly concerned about the quality of the commodity, not the cost. However, if you want to buy Bitcoin, your main concern is the cost.
The cost varies from person to person. If I go to mine, the cost may be $10,000, so for me, of course it is more cost-effective to buy directly.
However, there will always be someone who controls mining machines or electricity resources. The larger the funds, the more motivated they are to combine resources to achieve low costs. Once the price of Bitcoin approaches the minimum cost line, the funds originally intended to be invested in mining will no longer be invested, and people will choose to buy coins. This explains why the price of Bitcoin has never fallen below the electricity cost of mainstream mining machines.
Based on this phenomenon, we can make the following conclusion: the lower limit of Bitcoin price is the electricity cost of current mainstream mining machines.
However, even if we know this, there is still not much actionability. What if this round of bear market does not fall to the cost line? After all, a drop to 900 yuan like the last round is an opportunity that can only be encountered once in a while.
Therefore, we must first buy some Bitcoin when the price is relatively low, and then keep some money, or make more money, and wait for the opportunity that is hard to come by.
What does a relatively low position mean? Let’s take a look at the historical price of Bitcoin (Figure 2).
[Bitcoin Hoarding] 9. Advanced: Finding the Right Time to Buy
Figure 2. Bitcoin historical price and 200-day average investment cost
The red line is the price of Bitcoin, which conforms to the exponential growth model, and the green line is the exponential growth fitting line of the Bitcoin price. In theory, as long as you buy Bitcoin when the price (red line) is below the fitting line (green line), it is a good deal.
The blue line is the 200-day fixed investment cost. Note that it is different from the 200-day average price. The 200-day average price is the arithmetic mean, and the 200-day fixed investment cost is the geometric mean. Please search Baidu for the difference between the two. The geometric mean is always smaller than the arithmetic mean.
Imagine a person who started investing in Bitcoin 200 days ago, investing 1 yuan a day. His average cost is the blue line until today.
Many people advocate fixed investment in Bitcoin, which makes sense. Because the fixed investment cost (blue line) is running below the coin price (red line) most of the time. In other words, if you insist on fixed investment, you can outperform most people who buy coins all at once.
So, in what specific range is it most cost-effective to buy Bitcoin? It meets two conditions at the same time:
The price of Bitcoin is lower than the average cost of 200-day fixed investment, which means that buying the currency at this time can outperform those who make fixed investments.
The price of Bitcoin is lower than the valuation of the exponential growth model, which means that at this time, the price of the currency is undervalued.
Figure 2 is an index coordinate, which is not clear. We now define two ratios: Bitcoin price/200-day fixed investment cost, and Bitcoin price/index growth valuation. When these two ratios are less than 1 at the same time, the Bitcoin price is undervalued, and it is more cost-effective to buy Bitcoin directly than to invest in it for a long time.
Let’s take a look at the historical trends of these two ratios (Figure 3).
[Bitcoin Hoarding] 9. Advanced: Finding the Right Time to Buy
Figure 3. Bitcoin price/200-day fixed investment cost and Bitcoin price/index growth valuation
There have been two cases in history where both ratios were less than 1 at the same time. One occurred at the end of 2011 and lasted for 2 months; the other occurred in the first half of 2015. This is indicated by the red box in Figure 3.
After these two time periods, there is a long period of time (more than 1 year) when Bitcoin price/200-day fixed investment cost > 1, but Bitcoin price/index growth valuation < 1, which means that the coin price is still undervalued, but buying the coin directly is slightly worse than fixed investment, but the difference between the two is not big. In Figure 3, it is represented by the green box.
Both the red box and the green box that follows are very good times to buy Bitcoin. The time window is actually very long, so there is no need to rush and be afraid of missing out.
So where are we now? Today, both ratios have just crossed into the range of less than 1. In other words, we may be ushering in the third best time in history to hoard Bitcoin.
Considering that the production of Bitcoin will be halved in one and a half years, the third best time to hoard Bitcoin may be about one year. How much Bitcoin we can hoard in the end depends on our past savings and our ability to make money off-site in the next year.
Compared with the last bear market, the price of Bitcoin still halved in this range. But in any case, the cost of regular investment in this range will not be much higher than buying at the lowest point.
To sum up, in the long run, we can regard the miner cost as the fundamentals. In most of the time, fixed investment is an excellent strategy. When the price of Bitcoin is lower than the 200-day fixed investment cost and the exponential growth valuation at the same time, the price of Bitcoin is undervalued, and it is more cost-effective to buy Bitcoin directly than long-term fixed investment. Now that we have just entered the interval where the two ratios are less than 1, we may be welcoming the third best time to hoard Bitcoin in history, with a time window of about one year.
Li Xiaolai said in "Self-cultivation of Leeks":
All-in is a taboo for trading participants, and a certain percentage of cash should be retained at all times.
I completely agree and I don’t recommend anyone to go all in on Bitcoin. If you really want to hoard Bitcoin, it is not recommended to have more than 30% of your funds. We will discuss this issue again and again later. From various perspectives, going all in is not worth it.