Bitcoin Misery Index (BMI)

What Is the Bitcoin Misery Index (BMI)?

The Bitcoin Misery Index (BMI) is a heuristic measure of the momentum of bitcoin. The BMI was created in 2018 by Tom Lee. The BMI ranges from 0 to 100 and uses contrarian economic indicators, incorporating several different market factors, such as price, winning trades percent, and volatility.

Understanding the Bitcoin Misery Index (BMI)

The BMI was created in 2018 by Tom Lee, a co-founder of Fundstrat Global Advisors. The index incorporates the percentage of winning trades to total trades, as well as volatility. It shows a value of zero to 100. The index is considered "at misery" when the value is below 27. As a contrarian index, the closer the index is to zero the louder the "buy" signal.

Bitcoin was created by Satoshi Nakamoto in 2009 and is considered the first decentralized digital currency. While it has consistently remained the most well-known cryptocurrency, its price remained under $20 until Jan. 2013.

Interest in Bitcoin increased dramatically in 2016, with the price of one bitcoin increasing 123% by year's end. By 2017, investors were pouring into BTC, pushing the price to just under $20,000 in December. Investors who expected Bitcoin prices to continue their meteoric rise after Dec. 2017 were met instead by a decline of over 50%.

Special Considerations

As interest in Bitcoin has risen, so too have threats to its stability. Several countries have either banned or created substantial regulations targeting cryptocurrencies.

The South Korean government had several concerns, including embezzlement, money laundering, and the possibility of weakening capital controls. China's concerns included the amount of electricity used by bitcoin miners as well as money laundering and fraud.

Investors in Bitcoin and other cryptocurrencies have also had to deal with the possibility of their digital assets being stolen if they were stored in "hot wallets": digital wallets that were actively connected to cryptocurrency exchanges via the Internet. Several exchanges have been hacked, with Mt. Gox losing over $450 million and Coincheck losing over $500 million.

Regulatory and security uncertainty has given rise to a new type of misery index: the BMI.

Bitcoin and Forex Trading

Buying and selling in the foreign exchange (forex) market involves trades like spot transactions, forwards, foreign exchange swaps, currency swaps, and options.

Trading exposes investors to several types of risk, including transaction risk, interest rate risk, leverage risk, counterparty risk, and country risk. Unlike with trading U.S. dollars or euros, cryptocurrency investors have to contend with other risks created by assets based on a decentralized ledger. Without a central bank to act as a guarantor, if something goes awry with a cryptocurrency, investors may have little recourse.

The highly risky and speculative nature of bitcoin investing favors investors who are able to quickly analyze shifts in prices and understand the impact of news announcements and place buy or sell trades accordingly. Seeing low index levels in BMI may prompt less sophisticated investors to automatically buy bitcoin, rather than consider the option to buy while also surveying other factors that may impact prices. It is possible that much of the increased demand for bitcoin since 2016 has been from less sophisticated investors.

While indexes are useful as early warning indicators of market sentiment, they cannot predict the future. The BMI cannot predict whether there will be a theft at a cryptocurrency exchange. It won't be able to estimate whether the Securities and Exchange Commission (SEC) will require crypto exchanges to register as legal exchanges, rather than just Internet-based platforms that allow bitcoins to be bought and sold.