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Author Topic: BitCoin Logarithmic Trading Strategy  (Read 5021 times)
rabbitcoin
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June 08, 2011, 06:41:09 PM
 #1

Hello

These are my thoughts. Was wondering what other people felt and having a bit of sense check. I base my thoughts below on limited experience (i first heard of bitcoins last monday, first bought last thursday)

Thoughts:
This is a fast moving upward spiralling self fulfilling style market where money is chasing a limited supply of a security, which behind it has no intrinsic value and is not actually actively being used to trade goods and services (although it can be and might be in the future, it is not now - I am aware that there are some sellers of real goods but not in the context of a £75m mkt)

This px is moving higher as more people become aware of it and are putting money in. News is moving from online blog to mainstream media. Last week there were 300-700 pounds moving through the gbp exchange britcoin per day, today it is closer to £10k per day. In the US they are already well into the $ millions trading per day.

Current total market size is about £75m, I think that it has the potential to go up to £1-10bn order of magnitude as it would be a shadow retail market. There would be a price barrier around the £1,000 GBPBTC mark. From there to go further it would need to have a purpose (i.e. literally moving money from china offshore in USB sticks, main instrument in the black market) to go bigger

Downside is pretty large - it is used in blackmarkets (trafficking, drugs, etc) and at some point it will be attempted to be shut down by authorities.

Facts:
Market is growing exponentially

Very illiquid, when it drops, it will go to zero

Emotional market, not moving on any fundamentals
 

Strategy:
Take emotions completely out of it, recognise that it is an upward spiral self fulfilling mkt but work with it and not against it knowing that it will drop suddenly at some point

Derisks logarithmically that will leave exposure to upside but also constantly taking profit and defined intervals (i.e. sell half when px doubles or sell one third when price triples, etc, depending on your risk appetite - my example of quadrupling is below)

The end idea is to set up some explicit trading rules, not be greedy and have some fun.
 

Numbers:
Have 200BTC bought at an average px of 12.285 GBP

Have put a sell order of 50BTC for 49.14

i.e once it has gone up by 4x (initial investment is back)

Will be left with 150 BTC

When it hits 196.56 will sell 37.5BTC for £7,397

left with 112.5 coins

When it hits 786.24 will sell 28.125 for £22,113

left with 84.375 coins

And so on, but as i said i dont think it will move much further than around that price point

Thoughts comments and suggestions more than welcome.

Fanks
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Freakin
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June 08, 2011, 06:47:57 PM
 #2

My strategy is fairly simple.

1) Buy bitcoins
2) Huh
3) Profit
Dobrodav
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June 08, 2011, 07:02:11 PM
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That strategy is based on avoiding losess in other currencies putted in BTC.
Well, why not. I am think many of us act in that way.

We will  meet in not-so-distant future.
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June 08, 2011, 07:06:14 PM
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There are an infinite number of ways you can scale out of your position in BTC. You just need to be honest with yourself and pick a risk profile that you are comfortable with.
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June 08, 2011, 07:08:35 PM
 #5

good strategy rabbit.  Those with (?) strategy will live to regret that.
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June 08, 2011, 07:12:45 PM
 #6

There is this to remember: the bigger the bitcoin economy gets, the more attractive it's going to look to entrepreneurs.

Exactly the same logic that keeps miners, block rate and difficulty all in a nice balance applies to businesses.

Let's say I want to sell spark plugs; there are already well established spark plug businesses on the Internet; but what about this niche: a spark plug business that accepts Bitcoins.  If I can get 0.01% of the £75m, I'll be rich.  If that £75m becomes £100m, I'll be richer.

What I'm trying to say is that the meteoric increase in price is scary in some respects, but it also make a mighty fine looking opportunity for a successful businessperson.  And it wouldn't look as good if the economy were £75,000.


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June 08, 2011, 08:21:14 PM
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MOS_STP --> agree, just want to hear out what other people's risk profiles are. I think the first rule is that you only put in an amount that will not affect your quality of life if you lose it. In other words, if you earn 18k a year, dont put in 5k. If you are in debt, this is not a way out. I worry a lot about people with little losing money. Not nice. Once you know you are in and have built a risk position of 1, 10, 100 or 1,000 btc how do you design a strategy to maximise your return. Now this part also answers realnowhereman, lets try and work this out from a top to bottom approach (i.e. how high can it go)

We have the downside set - its 0, you risk everything. It makes sense to derisk your initial investment and when you do that depends on your risk appetite (risk averse = take out half your bitcoins when it doubles, ultra risk taker = take out 1% of your bitcoins when it is up by 100x ---> in both cases you took your money out). At some point you should take your money out! you can't buy a car with bitcoins (yet?). Strategy still maintains a lot of the upside.

Lets look at the upside. Lets look at orders of magnitude (everything will be very approximate) just to put things into context - World equity markets $40 trillion, debt capital markets about $100 trillion, US GDP 14 trillion, Spain GDP 1.5 trillion, Colombia's GDP 0.25bn. As an asset class I think the maximum this will get to in a best best ultra optimistic scenario is in the order of magnitude of 1 trillion (i.e. hundreds of thousands of dollars per bit coin) this is on the basis that the currency becomes a secondary shadow market (like cigarettes in prison?!? where in POW camps in WWII even non-smokers gave them value) either for the grey or black markets or for people to move restricted currencies on or offshore (think ISK, RMB, etc). The best precedent is the ETF market - grew on word of mouth, retail investor (i.e. an asset class based mostly on people buying with cash, not institutional investors like pimco, axa, aig, etc). That market has grown to about $3trillion, saw explosive growth in and is now functioning, transparent and liquid (ideally where BTC will go).

I'm really enjoying seeing this mkt develop! As I said, only found out about bitcoins 10 days ago!

Freakin --> ok, you can do that. I'll profit your like. Fanks

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June 09, 2011, 03:36:01 PM
 #8

This is my ideal way to work with bitcoin:

1) Earn bicoins by working for them (not buying or mining)
     a) accept modest pay cuts over time because bicoin is deflationary.

2) Pay for my stuff in bitcoins
     a) expect prices to drop over time because bitcoin is deflationary.

3) Repeat step 1

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TraderTimm
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June 09, 2011, 03:56:25 PM
 #9

Quote
This is a fast moving upward spiralling self fulfilling style market where money is chasing a limited supply of a security, which behind it has no intrinsic value and is not actually actively being used to trade goods and services (although it can be and might be in the future, it is not now - I am aware that there are some sellers of real goods but not in the context of a £75m mkt)

So to summarize without run-on sentences:

1. "The market is trending up" - yes, correct.

2. "It has no intrinsic value" - you may want to become better educated on what currencies are, and trade in general.

3. "Not being actively used to trade goods and services", "no wait, it is - but it is a smaller market compared to <whatever>" - Please slow down and compose your thoughts when posting. This is a contradictory statement. The size of this burgeoning market really doesn't have much relevance, except when trying to predict future growth.

As for your strategy:

A more concise summary would be: "I'm selling 25% of my remaining stake at 300% price change intervals."

Good luck with that, despite your fears of "falling to zero", you have no mention of a trailing stop or money management other than what is stated above.




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MatthewLM
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June 09, 2011, 04:03:46 PM
 #10

My opinion is that it is rational to buy when the price is low and you expect it to go up and sell when the price is high and you expect it to go down.

Since I expect bitcoin to be in a massive speculative bubble right now, I would expect the price to crash at some point. Investing in bubbles is a bad idea in my opinion. I would not buy bitcoins for speculation and I would sell if I held any for speculation.

It is unwise to see a graph which has had major price rises and you expect it to continue simply from extrapolation. This thinking causes bubbles to inflate faster until it bursts.

If you will trade in bit coin, trade over very short periods, is what seems sensible to me.

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rabbitcoin
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June 09, 2011, 04:32:48 PM
 #11

Hi TraderTimm! thanks for your thoughts. I probably did not express myself properly - what I am trying to say that although the currency can be used to buy and sell goods and services that is not the main current use right now. If it did become a security that was used and trusted to store value instead of speculating (an ideal scenario) at that point it would change (this is what I view as the upside).

I agree with your concise summary, was also explaining the rational behind it.

I was not considering a trailing stop, just risking an amount i was more than comfortable in losing and I am not convinced if it is applicable in this sort of market (where there are dramatic price jumps both up and down as liquidity dries and relatively small orders move the market in big swings).

What do you suggest as the optimal strategy if you thought that there was a price ceiling at X and owned Y BTC?



Quote
This is a fast moving upward spiralling self fulfilling style market where money is chasing a limited supply of a security, which behind it has no intrinsic value and is not actually actively being used to trade goods and services (although it can be and might be in the future, it is not now - I am aware that there are some sellers of real goods but not in the context of a £75m mkt)

So to summarize without run-on sentences:

1. "The market is trending up" - yes, correct.

2. "It has no intrinsic value" - you may want to become better educated on what currencies are, and trade in general.

3. "Not being actively used to trade goods and services", "no wait, it is - but it is a smaller market compared to <whatever>" - Please slow down and compose your thoughts when posting. This is a contradictory statement. The size of this burgeoning market really doesn't have much relevance, except when trying to predict future growth.

As for your strategy:

A more concise summary would be: "I'm selling 25% of my remaining stake at 300% price change intervals."

Good luck with that, despite your fears of "falling to zero", you have no mention of a trailing stop or money management other than what is stated above.




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June 09, 2011, 04:43:51 PM
 #12

My opinion is that it is rational to buy when the price is low and you expect it to go up and sell when the price is high and you expect it to go down.

Since I expect bitcoin to be in a massive speculative bubble right now, I would expect the price to crash at some point. Investing in bubbles is a bad idea in my opinion. I would not buy bitcoins for speculation and I would sell if I held any for speculation.

It is unwise to see a graph which has had major price rises and you expect it to continue simply from extrapolation. This thinking causes bubbles to inflate faster until it bursts.

If you will trade in bit coin, trade over very short periods, is what seems sensible to me.

Prove it - buy some options. PUT options should make you a nice profit if Bitcoin crashes.

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TraderTimm
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June 09, 2011, 04:47:00 PM
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Hi TraderTimm! thanks for your thoughts. I probably did not express myself properly - what I am trying to say that although the currency can be used to buy and sell goods and services that is not the main current use right now. If it did become a security that was used and trusted to store value instead of speculating (an ideal scenario) at that point it would change (this is what I view as the upside).

I agree with your concise summary, was also explaining the rational behind it.

I was not considering a trailing stop, just risking an amount i was more than comfortable in losing and I am not convinced if it is applicable in this sort of market (where there are dramatic price jumps both up and down as liquidity dries and relatively small orders move the market in big swings).

What do you suggest as the optimal strategy if you thought that there was a price ceiling at X and owned Y BTC?


Buying and holding a core position in bitcoin has proven to be a good strategy given the current price trends. This should be tempered with defined stop-loss points. (ie., if I lose 10% of my position I go flat and perhaps stick with mining, if possible.)

I think it is premature to expect a given price ceiling at this point. We really don't know what 1 bitcoin will be worth in the future. All we can really do is track price and act accordingly to our trading plans.



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June 09, 2011, 04:49:36 PM
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Prove it - buy some options. PUT options should make you a nice profit if Bitcoin crashes.

Actually he'd have to sell puts short to profit from bitcoin crash, because the options are on the dollar. But yes please sell me some puts i don't think its a bubble yet.

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June 09, 2011, 04:56:08 PM
 #15

My Strategy.



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June 09, 2011, 04:59:29 PM
 #16

When it comes to bitcoin, I'd say 1 bitcoin is equal to one ounce of gold. We just haven't reached that point just yet.

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rabbitcoin
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June 09, 2011, 05:41:32 PM
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When it comes to bitcoin, I'd say 1 bitcoin is equal to one ounce of gold. We just haven't reached that point just yet.


why an ounce and not 10 grams or 3 ounces? what are the fundamentals to that px?
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June 09, 2011, 06:17:57 PM
 #18

When it comes to bitcoin, I'd say 1 bitcoin is equal to one ounce of gold. We just haven't reached that point just yet.


By magic?

The question is, is the growth of the price of bitcoin fuelled by speculators?

Answer that as "no" and you probably feel quite safe buying bit coins for speculation. Answer that as "yes" or "I don't know" and you should be weary of buying bit coins for speculation.

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June 09, 2011, 06:47:27 PM
 #19

rabbitcoin, I am thinking along similar lines.  The utility of Bitcoin is independent of the exchange rate.  There are no fundamentals. This is a purely psychological speculative bubble.

As a first pass at a trading strategy, consider asset allocation plus rebalancing.  Convert 50% of your trading capital to Bitcoins.  Put in a buy order and a sell order at prices and quantities such that, if executed, either order will still leave you at 50%.  Every time an order is executed, cancel the opposite order and put in two new orders.  (The mathematical details are left as an exercise for the reader.)  This strategy leaves you some exposure to the underlying trend, and captures some of the volatility along the way.  The amount of volatility that can be captured is limited by trading costs.

Some tweaking is needed, as this strategy will ride Bitcoins all the way down to zero, wiping out all your capital.  So instead of Bitcoins = .5 * Capital, use Bitcoins = .5 * (Capital - Reserve).  Start with Reserve = 0, and increase it gradually over time.  Now if the exchange rate goes to zero, you exit with Reserve.

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June 09, 2011, 06:58:32 PM
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By magic?

The question is, is the growth of the price of bitcoin fuelled by speculators?

Answer that as "no" and you probably feel quite safe buying bit coins for speculation. Answer that as "yes" or "I don't know" and you should be weary of buying bit coins for speculation.

No magic involved - if you want to absolutely pedantic about it, here's the reasoning:

Current legacy market price for gold - $1,544 per/ounce (USD)

Current USD Valuation of Bitcoin: 29.15

Percent change needed to equal the green toilet paper valuation: 51.967%

Seeing how a lot of people see $100 USD to bitcoin coming soon, and a $1,000 USD to bitcoin not much after, it isn't out of the realm of possibility.

fortitudinem multis - catenum regit omnia
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