Simple arguments as to why an investment is worth buying are often the best. If something is really going to add value, there's usually no need for sophisticated analysis. But analysis is beneficial.
If you own or plan to buy Bitcoin (Cryptocurrency: BTC)there is a diagram you need to see and understand.
Bitcoin is a financial asset. While in the long term, Bitcoin's value is indeed heavily influenced by the constraints defined by its protocol, in the short term, it is affected by a variety of factors just like any other asset.
As Bitcoin has grown in popularity over the years, it has become integrated into the global financial system, which has reduced its isolation from the fluctuations of other assets. In other words, Bitcoin is now held broadly enough that people can easily sell Bitcoin in a hurry when the stock market crashes, or buy more Bitcoin on an ongoing basis as the economy provides them with additional income. But there is a silver lining to this dark cloud. Check out these charts:
The first chart depicts Bitcoin’s five-year price history and SPDR S&P 500 ETF Trust (NYSE:SPY)an exchange-traded fund (ETF) whose performance is consistent with S&P 500 Indexwhich acts as a proxy for the U.S. stock market. The second describes the correlation coefficient between ETF prices and Bitcoin prices, and the average degree of correlation over time.
Take a closer look at the correlation and then observe the price action of Bitcoin when the correlation is lowest. Notice something?
The correlation between Bitcoin and the broader market tends to break down before Bitcoin makes a significant move higher. Then, after Bitcoin peaked and began to fall, the correlation returned to near the mean.
Overall, the correlation between Bitcoin and the market is quite strong. During the periods of strongest correlation, both Bitcoin and the stock market were in an upward trend.
So what does this mean?
The most important takeaway is that if Bitcoin falls significantly while stocks are rising, it's more likely that this is a temporary condition for Bitcoin rather than a more long-term downturn. It might be a good idea to buy the dip.
But if Bitcoin falls when the market struggles, as it did during the 2022 bear market, the cryptocurrency could experience a longer decline and then fall into a downturn. This is a sign to start a series of dollar cost averaging (DCA) purchases and check back in a year or so.
For the purposes of this article, the chart only shows prices over the past five years. But the trend has continued over the past decade and beyond. Use this information to your advantage, but don’t let it cause you to be overconfident or bankrupt. Although this correlation may strengthen over time, there is no guarantee that the precise pattern will be maintained indefinitely.
While Bitcoin is attractive as a long-term investment, don't overinvest in it just because it's somewhat predictable. Diversification protects your portfolio. Since Bitcoin is easier to buy and sell than ever before, it may not retain as much value in the event of a crash as you would like.
That said, you now have some guidance on when to invest in Bitcoin to get the best pricing.
Before buying Bitcoin stocks, consider the following factors:
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Alex Carchidi holds a position in Bitcoin. The Motley Fool holds and recommends Bitcoin. The Motley Fool has a disclosure policy.
Hold Bitcoin? What You Need to Know Now These Charts were originally published by The Motley Fool