Created in 2018 by Wallstreet trader, Tom Lee, the BMI uses Bitcoin’s price action to derive a value ranging between 0-100 which is then interpreted by traders as a buy or sell signal. A value below 27 is regarded as the “misery” stage, which is a strong buy signal and a value over 67 is known as the “happy” stage which is the point where Bitcoin is likely to fall. The index is calculated by using the volatility and the number of winning trades out of the total trades.
It is a contrarian index which is informally known as “Fear Indexes”. These indexes measure volatility, which is then used to calculate a numeric value to assess the overall sentiment of the markets. The Bitcoin Misery Index is similar to the VIX, which tracks the prices of financial options to measure volatility.
Here is a chart showing the signals of the Bitcoin Misery Index for the past 10 years.It can be seen that whenever a great buy signal was seen, a sharp rally was observed soon after. The opposite can be seen when the index touched values over 67 and a reversal was seen shortly after. This is exactly what happened in December 2013 when the Bitcoin Misery Index touched 100.