You’ve probably heard the saying that money cannot buy happiness. But let’s be honest, really. How often have you felt sad for lacking the financial capabilities to meet a certain need? If you can’t satisfy a basic need, whether food, shelter, or clothing, chances are, you’re going to be miserable. If we could quantify how happy or sad a certain asset makes investors, we could gauge the market sentiment, informing our trade choices. This is where the misery index comes in.
About Bitcoin
Bitcoin was the first cryptocurrency to launch back in 2009. Today, it is the highest valued cryptocurrency; it went for less than $20 a pop until 2013. Over the years, its adoption has risen exponentially, duly reflected in its prices. However, this mass adoption has piqued the interest of regulators worldwide, with some taking more stringent measures to regulate it than others.
For instance, in South Korea, the government raised issues of BTC being used in money laundering, embezzlement, and proving a threat to traditional financial systems. In China, similar concerns were raised and the large energy outlay required by miners. This led to a total ban on cryptocurrencies in the latter country.
Another issue concerning this first market mover has been malicious attacks by hackers. Several exchanges have been hacked, losing investor confidence in the security of crypto holdings. Mt. Gox, for example, lost over $450 million to such attacks. Coincheck was another victim of cyber-attacks, losing more than $500 million. This uncertainty over regulatory and security concerns has brought about a new type of indicator, the misery index.
The evolution of the misery index
The first index to attempt to quantify the happiness or misery of citizens was called the economic discomfort index. It was obtained by simply summing the inflation and unemployment rates. Created by Arthur Okun, it was meant to give the then-president a quick glance into the state of the economy. It soon became an important talking point among journalists and political aspirants.
In 1999, an economist from Harvard created the Barro Misery Index. He included the change in interest rates and the GDP growth rate, which were to be subtracted from the misery. This provided a much more accurate measure of this index.
In 2011, Steve Hanke, an economics professor at John Hopkins University, created the Hanke’s Annual Misery Index (HAMI). This index includes unemployment, inflation, and interest rates charged by banks as contributors to misery. These are easy to justify, as the higher they are, the more the populace suffers. He also included the per capita change in GDP to offset their effect. This index is currently used worldwide to gauge the performance of economies. The higher the index is, the more miserable a country is thought to be.
About the Bitcoin misery index
In 2018, the founder and manager of Fundstrat Global Advisors, Tom Lee, developed the BTC misery index (BMI). He has over 30 years of experience as an analyst under his belt, so his credentials are nothing to take lightly.
This index attempts to gauge how happy or miserable BTC investors are, based on the current prices of the coin. It is measured on a scale of 0 to 100, with 100 being extremely happy and 0 the complete opposite. If the index reads anything below 27, investors are thought to be miserable. However, it is important to note that this index is a contrarian measure. This means that prudent investors will be looking to buy when it is low and sell when it is high.
How it works
It is no secret that crypto price charts tend to be very volatile. This introduces a huge level of risk for investors and provides them with unique opportunities for profit. Anyone intending to turn a profit trading these digital assets has to be capable of quickly identifying shifts in price trends. This can result from staying up to date with relevant news and happenings in the world of crypto and interpreting their effect on the market. It could also result from extensive technical analysis and identifying repetitive chart patterns.
BMI is another tool that can help traders predict some of these price shifts. Naturally, since the BMI indicates how sad or happy BTC holders are, a low reading may prompt a knee-jerk reaction to sell the coin. However, it is much more prudent to buy when other investors are miserable due to low prices. Similarly, when the BMI reads above 67, it is said to be in the happy region. When investors are optimistic about the rising prices, this could point to an incumbent downturn. This is why the prudent investor needs to close their open long positions instantly.
Be that as it may, the BMI is insufficient as a standalone indicator. Relying solely on it may cause you to rush into trading decisions, which could prove detrimental in the long run. What’s more, the BMI cannot predict when a major exchange will be hacked or when major regulations that can affect BTC’s pricing are going to be put into effect.
In a nutshell
The BMI measures how happy or sad bitcoin investors are with the current market prices. Its scale reads from 0 to 100. Anything below 27 is considered the miserable zone, around 50 the neutral zone, and above 67 the happy region. Since it’s a contrarian measure, lower readings are interpreted as buy signals, while the higher end of the spectrum prompts investors to sell their holdings. However, the BMI is not sufficient as a standalone indicator.
