Buying low and selling high is easier said than done, especially when emotion and volatile markets are thrown into the mix. Historically speaking, the best deals are to be found when there is “blood on the streets,” but the danger of catching a falling knife usually keeps most investors planted on the sidelines.
The month of May has been especially challenging for crypto holders because Bitcoin (BTC) dropped to a low of $26,782, and some analysts are now predicting a sub-$20,000 BTC price in the near future. It's times like these when fear is running rampant that the contrarian investor looks to establish positions in promising assets before the broader market comes to its senses.
Here's a look at several indicators that contrarian-minded investors can use to spot opportune moments for opening positions ahead of the next marketwide rally.
The Crypto Fear & Greed Index
The Crypto Fear & Greed index is a well-known measure of market sentiment that most investors use to crowd-forecast the near future of the market. If viewed purely at face value, an “extreme fear” reading, such as the current sentiment, is meant to signal to stay out of the market and preserve capital.
Crypto Fear & Greed Index. Source: AlternateThe index can actually be used as a market indicator, a point noted by analysts at the cryptocurrency intelligence firm Jarvis Labs.
One of the biggest factors that can help the index rise is an increase in price. Jarvis Labs backtested the idea of ​​buying when the index falls below a certain threshold and then selling when it reaches a predetermined high.
For this test, an index score of 10 was chosen for the low threshold, while scores of 35, 50 and 65 were chosen as sell points.
Fear & Greed returns for BTC. Source: Jarvis LabsWhen this method was backtested, results showed that the shorter time-frame option of selling once the index surpassed 35, as represented by the yellow line in the chart above, provided the best results. This method provided an annual average return of 14.6% and a cumulative return of 133.4%.
On May 10, the index hit 10 and continued to register a score of 10 or below on six of the 17 days that followed, with the lowest score of 8 happening on May 17.
While it's possible the market will still head lower in the near term, history indicates that both the price and the index will eventually rise above their current levels, presenting a potential investment opportunity for contrarian tra