Investors should never try to time a market. It's proven that consistent investments over a long period of time provide the safest path to substantial returns. But even if that is the case, it doesn't mean that investors can't try to maximize their potential upside. And right now Bitcoin (BTC -0.20%) has plenty of upside.
The relative strength index (RSI) is a straightforward metric used to measure the speed and magnitude of an asset's recent price changes to evaluate whether it is overvalued or undervalued. The thinking goes that when an asset's RSI falls into undervalued territory, it's theoretically a great time to buy, since the risk of prices falling further is supposedly minimal.
It should be noted that this doesn't mean prices must return to highs immediately. In fact, RSI values can stay in undervalued territory for months at a time. The advantage of tracking an asset's RSI is that investors are able to make more informed decisions based on current conditions in a broader, historical context.
RSI values range from 0 to 100. Traditional usage of RSI states that values above 70 indicate that an asset is overbought. Conversely, values under 30 are usually the measure for when assets are oversold and therefore undervalued.
Uncharted territory
So what does Bitcoin's RSI today indicate? Well, it shows that Bitcoin is hovering around a level that it has never seen before. In all of Bitcoin's history, it has never posted a monthly RSI below 41. Bitcoin's monthly RSI is at 41 this August. In June, it hit its lowest point ever when it fell to 39. Additionally, it has never resided below 43 for three consecutive months, which it has now done from June to August this year.
Historically speaking, Bitcoin has never been this oversold. In the bear market of 2015, Bitcoin's RSI only fell as low as 43, but was range-bound for most of the year between 43 and 47.
The most recent bear market of 2018 through 2019 rebounded quicker than 2015, but showed that Bitcoin's RSI tends to bottom out at around the low 40s. From November 2018 to March 2019, the monthly RSI was never higher than 45.
Past scenarios could unfold in the future
In hindsight, these two periods when the RSI fell to the low 40s were some of the best opportunities to buy Bitcoin. Let's imagine you invested $1,000 in Bitcoin at its lowest RSI and then sold when the RSI regained overbought levels of at least 70.
In January 2015, Bitcoin's RSI was at 43 and the price was only around $200. It wasn't until January 2017 that Bitcoin's RSI moved back up above 70. A $1,000 investment at the bottom would have been worth $5,000 by the time the RSI reached 70 again -- a 400% increase.
Let's use the more recent bear market as an example. Investing $1,000 at the bottom of 41 in January 2019, when Bitcoin was worth around $3,300, would have eventually turned into about $4,500 when the price of Bitcoin reached more than $15,000 and the RSI hit 76 in November 2020. That's a 350% gain.
It should be noted that Bitcoin often flies past the RSI benchmark of 70 once momentum picks up. Theoretically, investors could earn more profits if they sold when the RSI reached maximum levels of around 90, but that can lead to more risk of not securing a profit. Remember, there's nothing wrong with taking a profit.
Now that Bitcoin is hovering around the bottom of its historic RSI levels, an opportunity that comes around only so often is here. An investment in Bitcoin today minimizes potential risk and maximizes future returns.
It often takes more than six months before it returns to RSI levels of 70 or greater but based on recent developments surrounding Bitcoin, Bitcoin could reach healthier RSI levels sooner than usual. The partnership between Coinbase (COIN -0.34%) and BlackRock (BLK -0.68%) will allow institutional clients of the world's largest asset manager to buy Bitcoin and could lead to trillions of dollars eventually being allocated to the cryptocurrency. Institutional investors typically have much more capital than the more common retail investor.
So far, Bitcoin's rise to the most valuable cryptocurrency is the result of primarily retail investors buying and holding. With BlackRock clients now able to purchase Bitcoin, institutional investors might be able to send Bitcoin well past its all-time high. Don't feel rushed, but be confident knowing that past data and current trends substantiate that today might be one of the best times to buy Bitcoin.
