I bought into fear. Test Warren Buffett’s Bitcoin Strategy

“Buy when everyone is afraid and sell when everyone is greedy.” This principle of Warren Buffett is familiar to everyone who has even a little interest in investment theory.

Oleg Cash Coin worked as it should be applied to Bitcoin.

Saylora’s method

One of the main ideologues regarding the use of the concept HODL The head of MicroStrategy, Michael Saylor, became an institution at one point. By being attraction borrowed capital, diluting own shares, as well as use derivatives instruments, the company has accumulated more than 252,000 BTC since 2020.

Data: Bitcoin Sources.

Here you can also remember the recent experience of the Japanese Metaplanet, which in less than 2024 replenished its funds with 850 BTC. For this i use debt as a hedging tool for a position in digital gold in the options market.

The opportunities offered by large public companies are barely available to the average user who wants to collect their first cryptocurrency. However, he may be interested in changes to the strategy DCA – dollar cost averaging.

It involves the gradual purchase or sale of an asset in small equal parts, and not for the entire amount at once. This reduces trading and psychological risks, allowing you to design a clear and workable plan for the market.

Usually, in the investment process, simple entry periods are used: day, week, month. This will help you allocate budgets and create a realistic, long-term savings plan.

If we take the average annual return of Bitcoin over the last 13 years, we get a value of about 99%. Over the past 10 years, the average return was 66%, over five years – 51%.

Of course, this is not the X that some influencers promise, but what other asset gives an average of 50% annually? Besides, Bitcoin just sits in your cold wallet with no obligations to anyone. This is what Sailor talks about when he talks about digital gold profit:

“I think it makes much more sense to borrow $1 billion from the fixed income market and invest it in Bitcoin at 50% annually without the risk of collateral than to find someone willing 12-14% to pay me.”

As a more down-to-earth example, let’s take the best way to buy Bitcoin for a certain amount once a month – say, after receiving a salary.

Although the DCA strategy is very simple and quickly becomes a habit, many try to increase some of the rough edges that can increase profit without increasing risk in the long run. time

Buying fear

DCA optimization concept through market sentiment born from the assumption that buying assets in times of panic and fear is the most “profitable” investment behavior. This strategy may be familiar to you in the form of Warren Buffett’s well-respected formula: “Buy when everyone is afraid and sell when everyone is greedy.”

There is a simple tool on the crypto market – fear and greed index. Based on it, we can assume: periods of critical indicators from 0 to 26 are the best time to invest.

This assumption can be tested statistically over one-, three-, five-, and six-year time horizons by comparing average dollar costs per month to DCA during the Great Depression.

The main rule is to always invest the same amount, otherwise the average works differently, changing the logic in the calculation.

Classic DCA shows a return over the past six years of about 366% (the period chosen because the fear and greed index has only been running since 2018) and 220% over the past five years. Over three years, this figure is about 104%, and one year of monthly investment in Bitcoin creates a return of 26%.

In fact, it is easy for early Bitcoin holders to talk about the concept of HODL, when any contractual increase in Bitcoin by $1000 now means only ~1.5% of the investment for new users. Meanwhile, the same exchange rate change can give “old timers” 2x or more.

We have to admit: early hodlers are on the other side of the divide from the average user who is going to collect Bitcoin. And unrealistic promises of easy enrichment only push newcomers away from cryptocurrencies, disappointing them prematurely.

Correlation of fear and greed index with Bitcoin level. Data: Bitstat.

To reduce random fluctuations in the index, let’s make it a rule that Bitcoin is always bought on the second day after the index falls below 26 (“Extreme Between”). In this case, the market is definitely in a state of panic, and it is not by chance that the index entered the critical zone.

The only thing that complicates the situation is that investment opportunities in Bitcoin are very rare during the bull period: values ​​are mostly in the “green zone” and almost no no fear.

Results

In the last year from October 2023 there are only two possibility for investments that would yield around 8% annually, which is very low even for the traditional banking sector.

The intervening three years from October 2021 would have allowed 22 market entries with an average Bitcoin price of $31,700, producing a return of around 211%.

Five years of investing on Day 2 of Extreme Fear alone would have yielded 35 entry points with an average digital gold price of $19,300, for a return of 347%.

A period of six years of investment on the fear index would allow 62 to enter the market with an average Bitcoin price of $10,140 (about 660% of the investment).

Therefore, classic DCA is inferior to the investment returns that come from the “buy when everyone else is afraid” principle. However, this strategy has a serious problem – there are few opportunities to buy in a growing market. It can be assumed that the best strategy to invest in long bearish trends.

The investment strategy based on sentiment can also be increased towards sales – by liquidating part of savings in “Extreme Greed” times. From these observations, the conclusion says that Buffett’s principles are very suitable for Bitcoin.

Of course, it is convenient to calculate the numbers in retrospect. But at least over the past six years, we can see how a market shock could multiply the returns on investments in Bitcoin.

Of particular interest is the three-year period, where a standard DCA would have returned 104%, while a fear-based DCA would have returned over 200%. The difference is huge, even for a statistical sample.

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