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.

Hello - can you give me an example with numbers? I think I know where you are going but this sounds like it is caputuring more vol than the trend. I dont think it is easy to capture vol as the liquidity is so limited that as soon as you trade on it in any sort of volume you move the market back. Thoughts?