Bitcoin Investment Guide for Latecomers (2021)
I heard about bitcoin’s boom in late December 2020. When I looked at the price chart, it was at USD $18,000 per bitcoin.
I thought to myself, “I guess I’m too late for this. I don’t want to hop into the bandwagon as a latecomer. What if the price crashes next week, like what happened in 2017?”
It was also in late December 2017 when bitcoin’s price fell from USD $19,450 to USD $14,023 in five days, making a 29% free-fall. To be fair, bitcoin found a new support price at around 3000 USD, which is more than 600% of its value compared to January 2017.
Anyone who had bought bitcoin in January 2017 could argue with me that their investment was worth it. Anyone who had bought it at a huge loss would agree with my concerns — and some may even have sworn to never touch cryptocurrencies again.
Buying bitcoin as a latecomer
I bought my first Bitcoin in March 2021 as a latecomer. And in hindsight, it was clear that as of December 2020, bitcoin’s price had nowhere to go but up. I still wasn’t convinced at the time, however.
My pessimism stemmed from my personal experience trading in the stock market, which was the most volatile market that I knew at the time. I’ve traded all kinds of stocks (blue chip, mid-cap, penny stocks) and have experimented with all kinds of trading approaches.
From this, I came to the conclusion that the best time to buy is not when the price is skyrocketing. It’s also not that wise to enter when the market is bearish (when prices are moving downwards).
The best time to enter is when you are certain that the likelihood of the price moving upwards is greater than the likelihood of it moving downwards.
Of course, this is purely derived from my own interpretation and should not be taken as financial advice. When it comes to any investments, you should always conduct your own research beforehand.
I bought my first bitcoin in March, despite knowing that I’ve missed capturing a large 150% gain since December. It was at a time when I was already familiar with bitcoin’s price pattern. Knowing how bitcoin’s price behaved has lowered my investment risk.
More on bitcoin: Read our complete guide on Bitcoin.
Managing risk with technical indicators
Price charts usually come with indicators that calculate different values and ratios that are compared against the real-time price movement. These indicators are useful for technical analysis, where a trader studies short-term price patterns and looks for trading opportunities.
So, why are we discussing indicators used by traders when our objective is to invest in bitcoin?
No matter how you define investing, it still holds true that investing is the action of buying an asset when its value (price) is low, holding the asset for an extended period of time, and then selling the asset when its value appreciates.
Technical indicators work for all time scales, whether you are a scalper (someone who trades multiple times a day for incremental profits) or a life-long investor who wants to increase the value of life savings.
Read more: Cryptocurrency technical analysis for trading.
Introduction to technical analysis and risk management
Why are prices in price charts represented as red and green candles, and not lines that connect the average price per second, minute, hour, or day?
It’s not easy to point out the average price of an asset at a given time. At the same instance, buyers and sellers quote different prices, and the “current” price can change even in a fraction of a second. The candles simply represent the range that the price has moved within a given period of time.
The simple moving average
At times, the candle patterns look messy on the chart, so indicators are used to make sense of the noise. The most easily understood indicator to use is the simple moving average indicator.
The simple moving average indicator (SMA, for short) indicates the average closing price (the last price quoted before the next period begins) over a given number of past periods. This indicator represents a continuous line, which helps to ‘smooth out’ the chart to make the price trend look more obvious.
You can choose how far back in the past where the SMA applies. The most common types of SMAs are the 20, 50, 100 and 200-period simple moving averages (abbreviated 20-MA, 50-MA, 100-MA, and 200-MA).
You may find that prices ‘bounce’, or for a better word, retrace whenever the price touches any one of the indicators. This is the first and foremost important price pattern that you should know before putting your money at risk.
Support and resistance lines
Unlike the simple moving average, most price charts don’t provide this information automatically. You will need to do some pattern-seeking study, but don’t worry because this is easier than you think.
Consider bitcoin’s daily price history between February and April on the daily chart below. Even if the market was bullish on bitcoin, the price steps up in a predictable pattern.
The lines coloured in green, orange, and blue represent the support/resistance lines. I chose these lines because the prices tend to retrace whenever they enter any of these areas.
Of course, based on your own discretion, you can add more support/resistance lines. There is not one right answer, as each trader has their own idea of where to draw the line, both literally and figuratively.
Support refers to the fact that a price level can become a new minimum. If you buy your bitcoin just when the price retraces right after it hits this line, there is a smaller chance that the price can go below the line.
When this happens, we say that the price has found a new support. The reverse is also true. Right after hitting all-time highs, the bitcoin price tends to move lower and lower until the old support line is met or until a new support line is established.
So, your horizontal support/resistance lines will determine the best time to buy bitcoins, and even the best time to sell bitcoins. Since we are investing for the long run, we will only talk about selling when certain conditions are met.
The right time to buy Bitcoin based on technical analysis
When we combine the two types of technical indicators, our chart will look way easier to study and analyse. Consider the price chart below for bitcoin.
The purple arrows represent possible entry points. They have different sizes, which represent how confident I would be if I were to enter at that point.
Let’s rewind to early February when we can’t exactly draw out the support/resistance lines, since the price is still in a large upswing. At any time here, it’s healthy to assume that the price could drop.
1. First hint of support at USD $46000
There were the first few small dips in mid-February that can possibly tell us that the price is hitting an important level — it could be a potential support/resistance line (green line)
At this point, we can’t know for sure that the price wouldn’t go down; it’s not so safe to buy bitcoin at this point.
2. Second hint of support after all-time high
Later on, bitcoin would hit its February all-time high, creating another support/resistance line (blue line). Remember — this is the worst time you can put your money into bitcoin.
The price then seemed to hover around the 49950 USD level, and anyone could use this as another support/resistance level (orange line).
3. Still waiting and watching
So, now that we have three lines backed up by history, we are more confident than ever to anticipate when we can enter the market.
The first purple marker could be the entry line for some people, as they think that the price could go up, since the price hits both the support line and the 20-MA line.
Unexpectedly, this support line fails to become the minimum price level for bitcoin, and the price falls to the green support line.
4. Higher confidence of entry position
If you wait just a little more, the price indeed retraces to the orange resistance line very strongly.
This could have been a better point of entry. Why, because right after this point, the orange line will become a stronger support line. It’s highly unlikely that bitcoin’s price will just bounce between the green and orange line.
5. Accompanied by the 50-period moving average line
After the next all-time high at 61000 USD, the price dips to find the orange support line. Only this time the line is accompanied by the 50-MA, which is a stronger moving average line compared to the 20-MA, which would guarantee a higher chance for a bullish retracement.
You can also see the 50-MA is tested again and again, but the price simply doesn’t break the line. You can be more certain it’s much less risky to buy bitcoins at these points.
Risk management for Bitcoin investors
Now we know when to buy bitcoin, but we still don’t know how much of our money to put into bitcoin. The way to calculate how much money to buy bitcoin is to choose your risk tolerance (in percentage) and the distance to the last support level (also in percentage).
Now, some people don’t really want to overcomplicate themselves with the below calculations. In which case, they would be more comfortable to use a dollar-cost averaging strategy, which is to put aside equal amounts of money at regular intervals, regardless of the current price.
If you are like me, who is super geeky and likes to optimise my returns in bitcoin, go ahead and continue reading.
Related: Read more on dollar-cost averaging.
What is a crypto investment budget?
An investment budget is simply the amount of money that you plan to invest, which you currently have yet to convert into cryptocurrencies.
Even if you won’t buy bitcoin with your entire savings (which is not smart), I don’t recommend you to buy bitcoins at once with your entire investment budget. Leave some fiat cash in hand so that if you incur some losses, you won’t become too emotional, and continue to make bad decisions.
Unlike the dollar-cost averaging strategy, this approach demands that you don’t immediately buy bitcoins whenever you have cash available for investment. You should keep an account of “money for buying bitcoins” separate from other accounts for other needs.
You can think of it as a “waiting room” for your fiat cash to be converted into bitcoin at just the right time.
Determine your risk tolerance
Next, determine how much money you are willing to lose each month. Some people can name an absolute value, while others would tolerate a certain percentage of loss out of the whole investment budget.
It is really up to you to decide your risk tolerance. The higher your risk tolerance, the higher your potential rewards will be. In this example, we’re going to use my risk tolerance, which is 1% per entry attempt.
Let’s say that in March, I had 1000 US dollars as my starting investment budget, waiting to be converted into bitcoin.
1% of $1000 is $10, the maximum amount of money I want to lose if my timing was bad.
Most people, I think including me, would have entered the market at the point indicated by the purple arrow. From this point to the green support line, the distance is around 5%. If the price moves down, there’s a high probability that the price will stop after hitting the -5% mark.
Now, the price did move down 5%. If I had invested ALL my money into bitcoin at that point, I would lose 5.52% of $1000 in just 5 days, which is a painful $52 (it’s painful to me, at least).
But if I had followed my rule of losing just $10 (or 1%) per failed attempt, then I would start off with a small experimental buy.
$10 loss is 19.2% less than my potentially high loss of $52. Therefore, I should start off with only 19.2% of my total investment budget, which equals $192.31.
Lower your risk even further
If I’m feeling less confident, I can even just invest $150, so there is an even smaller chance for me to lose $10 on this attempt if the price moves further down.
We’re all human, and sometimes after some exciting news, we want to jump right in. Let’s pretend that I bought my bitcoin right after the all-time high — instead of patiently waiting for the price to reach the orange support line and the 50-MA line.
Before putting my money at risk, I have to know how much I can potentially lose. The distance between the entry price level and the orange support line is pretty huge, at minus 12%.
If my risk tolerance is the same, at 1% of my account per failed attempt, then I would have invested only $83 out of $1000. This is because 12% of $83 is about $10.
Increasing your reward once a pattern is clear
Now, I still want to put all my money into bitcoin, but not at the same time. When the price reaches an optimal level, and there is little chance for it to go down, you can become more confident and “take more risk”.
Entering at this level means that the potential risk is down to minus 1.69%, meaning that a bigger investment can be made, knowing that the potential loss for an all-in investment is around $16.90, which is still manageable.
Further reading: Beginner investment mistakes to avoid.
It’s never too late to buy bitcoin. Do not ever let anyone pressure you into buying bitcoin immediately. People have different risk tolerances, which is why there are buyers who buy “at the wrong time” — they can afford to lose more.
Even if you are a long-term investor who swore by the potential of blockchain technology, it’s not going to hurt to learn some basic technical analysis to determine the most profitable times to enter the market.
Use at least two simple moving averages, with most common being the 20-MA, 50-MA, 100-MA, and 200-MA. These will help you determine the long-term and short-term trends of the market.
Learn to discover support and resistance levels so that you can quantitatively gauge the risk of entering the market, and how great of a risk is relative to your risk tolerance. Get to know your own risk tolerance, and what percentage of your capital you can afford to lose.
Don’t ever go all-in on something that is currently booming within a short period of time. This brings an inherently large risk, one that you may not be able to comprehend due to the heat of the moment.
Well, that’s all there is to it. Before buying any bitcoin here, spend a few days looking at the hourly chart of bitcoin. Try to find a solid support and/or patterns so that you can risk more capital for your investment.
Get started: Click here to get started investing in Bitcoin.
This article was written in Q2 2021. The strategy shared in this article was based on the current market conditions at the time the article was written and does not guarantee success in the future. As such, this article is not financial or investment advice.