My bitcoin investment strategy - fixed allocation - listening to ALL your parts

[RationalSpeculator]

I think I have developed a very good investment strategy that might help some here. I say some because there are many other investment strategies that will work. But in case you have been losing money, or you felt too much stress, you likely don't have a good one.

I allocate a fixed percentage of my capital to bitcoins. My target exposure is 40%. This way if the price goes up my exposure goes above 40% and I am forced to sell bitcoins, and if the price goes down and my exposure goes below 40% I am forced to buy more bitcoins. This goes against some strong emotions as the bull in you does not like to sell any coins when everyone is bullish and the price is going up. As everyday the bull is proven right that selling before was a mistake. Inversely, buying when the price goes down goes also against your emotions as the fear comes in and price will likely continue to fall so we should wait! But instead this system forces you to buy.

From a risk perspective this allocation strategy also makes sense because managing your risk means never bet too much of your capital on something, but also don't bet too little on something that has a big chance of making you a lot of money. Typically if you don't have a fixed allocation strategy what happens is that into rallies your allocation to bitcoins goes up way above what you would have chosen yourself if you were to make a fresh decision, and inversely into crashes your exposure becomes much lower than what you would have chosen yourself, if you were to make a fresh decision.


I'm not saying emotions are bad, they are not, they tell you something very important, to be fearful/chicken from something that goes down in value, and to be brave/greedy for something that goes up in value, makes good sense. However, letting these parts take you over in your decision making is not wise. Letting any parts/feelings that you have take you over is never wise. The key is to listen to your different parts and make a decision so that all your parts are satisfied. Because, very likely, when the market goes up and your greedy part says 'buy more', you also have a fearful part in you, saying 'no, this is too risky!'. And when market collapses and your fearful part says 'don't buy, too risky!' or even worse 'sell now!' you likely also have a brave part saying 'but now is the time to buy!'. Many people just ignore certain parts in them and let only one part take themselves over and act it out. This is a recipe for disaster.    


Ofcourse having allocated always 40% of my capital means that if bitcoin fails and goes down to zero, I will continue to buy and lose all my capital. So one thing that is very important for this strategy is to always check the fundamentals. If the fundamentals are broken this strategy should be halted and no more buying. I don't mean government intervention as this cannot destroy bitcoin, but technical issues, or a competing currency taking over bitcoin, may never be ignored, even if is just a thread on the horizon, it should be investigated in depth as failing to notice in time will be a disaster.

I executed this strategy myself since I started investing in bitcoins at the end of 2012 around $15. I did not stick to this strategy and made some serious mistakes. My initial allocation was way too small when I entered around $15 with only 7% of my capital because I applied the incorrect saying 'invest only what you can afford to lose'. As the rally progressed I also gradually let go of my allocation target more and more and when it counted most, around the high of $250, I was exposed way above my target and sold way too little that day. Still with bitcoin around $150 today my return on my - complete - capital is 45% today, which is very respectable to me. I sold into the rally, bought into the crash, and am selling again into the current rebound. I succeeded in buying low and selling high and always kept an exposure to bitcoin.


I have added some more tweaks to this strategy and will gladly share if I see that some here value my post.  

[RationalSpeculator]

Anyone willing to give me some truth why probably no one responded to my post?

Is it my doing? What could I improve?

[600watt]

Anyone willing to give me some truth why probably no one responded to my post?

Is it my doing? What could I improve?

i like your post. but i think the average guy here falls asleep if he has to read more than 3 sentences in row

[ineededausername]

Buy and hold: 1000%
Your strategy: 45%

wonder which one I want

[blackreplica]

Your thread was probably pushed off the page quickly because idiot trolls are shouting multiple threads at the top of their lungs

Yours is a mature, sane strategy, but I still think one should pay mind to how much they are willing to commit in terms of fiat at the outset to avoid overcommitting in extended dips, and that I also personally think that this form of thinking will not be easy to adopt by novices to investing.

ineedausername> give him a break. he admitted himself he made mistakes. We need more constructive threads like this in this forum.

[seleme]

Still with bitcoin around $150 today my return on my - complete - capital is 45% today, which is very respectable to me.

So, you don't stick to your system though you said not sticking to it caused mistakes.

[BitChick]

Anyone willing to give me some truth why probably no one responded to my post?

Is it my doing? What could I improve?

i like your post. but i think the average guy here falls asleep if he has to read more than 3 sentences in row

Yes.

My husband and I thought we would try to invest in BTC slowly and steadily but then just threw caution to the wind with the prices started to skyrocket.  With all of the talk about BTC being worth $500, $1000, $100,000 or more at some point we felt we had to abandon plan A and go for plan B which was going "all in."  Now perhaps it would have been better to be more methodical about it and not emotional.  We were not able to capitalize when the price dropped because we were not liquid enough to take advantage.  As long as the price keeps going up we are not losing any money.

So, I guess I would say just do what makes sense to you.  If the prices rise, no plan is really a bad plan as long as you end up with more BTC and your plan will certainly allow for that.

[jzcjca00]

Anyone willing to give me some truth why probably no one responded to my post?

Is it my doing? What could I improve?

I can't speak for anyone else, but I didn't respond because I didn't see your post until now.  There are so many posts every day, mostly by people who have nothing useful to contribute, that the good stuff gets buried.

The same thing happend to my post yesterday at https://bitcointalk.org/index.php?topic=187530.0.  Only one short response before it got buried among the rabble.

I would appreciate if you would read my post and respond!

I discovered this morning that there is already a trading bot that does something very similar to your strategy.  It periodically uses limit orders to readjust the portfolio to keep 50% in fiat and 50% in Bitcoin.

I'm using a slightly different strategy.  I estimate that the price of Bitcoin will probably mostly stay between $100 and $300 in the next 6 months.  I have spread my bitcoins out across that range, in the form of buy limit orders backed by fiat between $100 and the current price, and in sell limit orders backed by owned BTC between the current price and $300.  Whenever the price goes up, the sell orders automatically execute, and I use the proceeds to back more buy orders lower down.  When the price goes down, the buy orders execute, and I use those bitcoins to back new sell orders higher up.

The primary difference between our strategies is that my percentage in fiat is variable, based on my predictions about the future trading range.  When the price is $100 or less, I will be 100% in BTC.  When the price exceeds $300, I will be 100% in fiat (except for the 10 BTC I'm holding in reserve in case the price suddenly goes to $1 million).  Assuming the price stays mostly in this range, I should get higher returns.

Our strategies are similar in that, if the price goes to zero, we're both screwed.  We're both left holding lots of worthless bitcoins.  Also, if the price goes straight up, our strategies keep pruning the bitcoins until we're left with fewer than the "buy and hold" strategy.

However, the best way to predict future behavior is to examine relevant past behavior.  We've seen extreme volatility around a steady exponential increase, and I expect that trend to continue.

I would like to hear your thoughts on the differences between our strategies.

[RationalSpeculator]

Wauw, thank you all for the many responses

Buy and hold: 1000%
Your strategy: 45%

wonder which one I want

This is a fair criticism. But you are comparing apples to oranges also.

I went in with only 7%, and then I applied the strategy to sell on highs and buy on lows.

If you want to compare the returns of buy and hold vs my fixed allocation strategy you should also take 7% initial investment for the buy and hold.


Here are the actual numbers. At entry price of $13 and current price of $130 I sevenfolded my bitcoin investment. A buy and hold would have ninefolded my investment.

However, I only sevenfolded because I lost a big chunk of my fiat profit to the exchange clamp down of bitcoin-24. But indeed that's extra risk for any trading strategy vs simply buy and hold. But very bad luck on my part as this is the first exchange where the fiat is frozen and seized. Until now all exchanges that had their bank accounts closed did return the fiat.  

But I take your criticism and it's a good point. I would have been better of today with a buy and hold.

My counterargument to it would be that it can still change. All depends on the future price of bitcoin. If bitcoin goes to $60 for example, a buy and hold strategy will only have fivefolded the capital with entry at $13. But I will have, I estimate, sixfolded my capital then, even after taking a huge exchange clamp down hit. Without the clamp down I would likely have eightfolded my capital by then.

With current price 10 times higher than entry price in only 5 months, a buy and hold wins out. But this is an exceptional rapid increase, that on average does not even happen on a yearly basis. So chances are right now considerably higher for the price to go sideways or down, which will be in my advantage.

Thanks for your criticism, I admit it's a strong argument and I am considering switching strategies to a simple buy and hold, if I ever get the chance to load up btc again at cheaper or depressed levels.

[RationalSpeculator]

i like your post. but i think the average guy here falls asleep if he has to read more than 3 sentences in row

thanks mate

[RationalSpeculator]

Your thread was probably pushed off the page quickly because idiot trolls are shouting multiple threads at the top of their lungs

Yours is a mature, sane strategy, but I still think one should pay mind to how much they are willing to commit in terms of fiat at the outset to avoid overcommitting in extended dips, and that I also personally think that this form of thinking will not be easy to adopt by novices to investing.

Thanks blackreplica

Could you elaborate on what you mean with 'overcommitting in extended dips'? And how this came up for you when reading about my fixed allocation strategy?

Why do you think novices to investing would have more difficulty with such fixed allocation strategy?

[RationalSpeculator]

Still with bitcoin around $150 today my return on my - complete - capital is 45% today, which is very respectable to me.

So, you don't stick to your system though you said not sticking to it caused mistakes.

Yes. I learned my lesson and am now sticking to my fixed allocation strategy much better.

I don't understand what you mean with your post?

[seleme]

Still with bitcoin around $150 today my return on my - complete - capital is 45% today, which is very respectable to me.

So, you don't stick to your system though you said not sticking to it caused mistakes.

Yes. I learned my lesson and am now sticking to my fixed allocation strategy much better.

I don't understand what you mean with your post?

Maybe I haven't understood good, English is not my native language. You said that your strategy is 40% in coins and I see that 45% there.

[RationalSpeculator]

Anyone willing to give me some truth why probably no one responded to my post?

Is it my doing? What could I improve?

i like your post. but i think the average guy here falls asleep if he has to read more than 3 sentences in row

Yes.

My husband and I thought we would try to invest in BTC slowly and steadily but then just threw caution to the wind with the prices started to skyrocket.  With all of the talk about BTC being worth $500, $1000, $100,000 or more at some point we felt we had to abandon plan A and go for plan B which was going "all in."  Now perhaps it would have been better to be more methodical about it and not emotional.  We were not able to capitalize when the price dropped because we were not liquid enough to take advantage.  As long as the price keeps going up we are not losing any money.

So, I guess I would say just do what makes sense to you.  If the prices rise, no plan is really a bad plan as long as you end up with more BTC and your plan will certainly allow for that.

We have a female in the house

Thanks for replying BitChick

What do you mean with 'yes', do you think my post was too long to keep attention?


Thanks for sharing your strategy. I'm getting the impression your plan b to go all in, was not really a plan but panic buying?

May I ask what your average buy in price has been?

Do you have fears of the price dropping?

Would you have preferred to have done things differently?

[odolvlobo]

Your strategy is a standard diversification strategy for managing risk. It is a sound strategy and I encourage everyone to use it.

My only complaint is that 40% is much too high. Bitcoin is extremely risky. Take a moment to consider what losing 40% of your money might do because there is a good chance that it will happen.

Personally, I have 10% of my money in Bitcoin and Litecoin. I feel that 10% is too much for me (being a more conservative investor), but I am a Bitcoin fanboy and I can't help it.

[RationalSpeculator]

I can't speak for anyone else, but I didn't respond because I didn't see your post until now.  There are so many posts every day, mostly by people who have nothing useful to contribute, that the good stuff gets buried.

The same thing happend to my post yesterday at https://bitcointalk.org/index.php?topic=187530.0.  Only one short response before it got buried among the rabble.

I would appreciate if you would read my post and respond!

I discovered this morning that there is already a trading bot that does something very similar to your strategy.  It periodically uses limit orders to readjust the portfolio to keep 50% in fiat and 50% in Bitcoin.

I'm using a slightly different strategy.  I estimate that the price of Bitcoin will probably mostly stay between $100 and $300 in the next 6 months.  I have spread my bitcoins out across that range, in the form of buy limit orders backed by fiat between $100 and the current price, and in sell limit orders backed by owned BTC between the current price and $300.  Whenever the price goes up, the sell orders automatically execute, and I use the proceeds to back more buy orders lower down.  When the price goes down, the buy orders execute, and I use those bitcoins to back new sell orders higher up.

The primary difference between our strategies is that my percentage in fiat is variable, based on my predictions about the future trading range.  When the price is $100 or less, I will be 100% in BTC.  When the price exceeds $300, I will be 100% in fiat (except for the 10 BTC I'm holding in reserve in case the price suddenly goes to $1 million).  Assuming the price stays mostly in this range, I should get higher returns.

Our strategies are similar in that, if the price goes to zero, we're both screwed.  We're both left holding lots of worthless bitcoins.  Also, if the price goes straight up, our strategies keep pruning the bitcoins until we're left with fewer than the "buy and hold" strategy.

However, the best way to predict future behavior is to examine relevant past behavior.  We've seen extreme volatility around a steady exponential increase, and I expect that trend to continue.

I would like to hear your thoughts on the differences between our strategies.

Hi jzcjca00,

Thank you so much for your thoughtful response

Interesting thread you launched too, I replied there also. I also missed your thread eventhough I scanned the speculation board a lot yesterday.


I like your tweak to have higher exposure to bitcoin when prices are relatively low, and have lower exposure to bitcoin when prices are relatively high. In fact I do that also but didn't want to complicate the initial opening post too much. Today for example I only have 15% exposure to bitcoins instead of my target 40%.

Just from a risk/reward perspective, it makes no sense to me to be highly exposed to bitcoin when the price has been going up parabolicly, doubling faster and faster, since then the risk for a serious correction, and serious loss, becomes higher by the day and in fact goes up to 90% certainty for a serious correction. Also the potential reward is going down continuously. At $15 end 2012 it could easily tenfold. But around $150, potential reward was only doubling, trippling, at best quadruppling.

So risk/reward becomes very bad. 80% chance to lose -75% of your capital, 20% chance to tripple your capital is a bad bet to take. So a good speculator doesn't play it. I however decided to always be in with some capital like you, but indeed I want the lowest possible exposure there. Inversely, when prices are depressed, like after 2011 bubble, risk/reward is very favorable. Only 20% chance for a serious correction losing -75%, and 80% chance to tenfold your capital in 1 year, is a great bet to take.


What I do is I base my allocation exposure on where the price is in relation to the 200 day moving average. So if price is equal to 200 day moving average I want my average exposure of 40%, if price is 600% above 200 day moving average I want only 10% exposure to bitcoin (maximum was 1200% above 200 day moving average at $30 in 2011, around $250 recently price topped at 900% above 200 day moving average). If price is -50% below 200 day moving average I want 80% exposure to bitcoin (maximum was -78% at $2.5 in 2011).  I do that all gradually.

I'm a little afraid to allocate 80% of my capital to bitcoin, how I will do it is buy in up to 50% of my capital, but when it goes up I won't be selling immediately, as long as price is -50% below moving average I will allow bitcoin to grow to 80% of my capital.


Your analyses how our strategies will fail is very good. It all depends on whether bitcoin will survive. We risk destroying our complete capital. This is another good argument I think in favor of buy and hold. If you decide to allocate certain % to bitcoin once, and then not touch it and only take some profit when certain price points are reached, never to use that profit to buy back in, you have a certain profit if bitcoin ends up failing, and you also have a chance to become filthy rich, which seems much harder with our strategies.

Interested what you think about this. I'm seriously contemplating switching strategy to buy and hold.

[RationalSpeculator]

Your strategy is a standard diversification strategy for managing risk. It is a sound strategy and I encourage everyone to use it.

My only complaint is that 40% is much too high. Bitcoin is extremely risky. Take a moment to consider what losing 40% of your money might do because there is a good chance that it will happen.

Personally, I have 10% of my money in Bitcoin and Litecoin. I feel that 10% is too much for me (being a more conservative investor), but I am a Bitcoin fanboy and I can't help it.

Thanks odolvlobo for your good critique. I would not want to lose 40% of my capital. But equally I also do not want to only double my capital when I succesfully invested in something that tenfolded in value.

Today bitcoin has tenfolded and I only succeeded in adding 50% to my capital. That's a bummer frankly. I saw the opportunity of bitcoin end 2012 around $10 and knew that this could easily tenfold. It happened much faster than I had expected, I thought 1-2 years. But I failed to capitalize on it decently. I think I made a serious error originally to allocate only 7% of my capital to such a good bet. In fact I allocated originally 5% and boosted it up quickly to 7% as I realized I wanted to at least double my capital if I proved to be right. Today the price has tenfolded and I didn't even succeed in doubling.

Capital serves as my security, but it also serves as a source of income and wealth creation. Finding the balance between that is difficult.

I am no longer supporting the philosophy 'only risk what you can afford to lose'. Because that will never make you money. It's putting security above risk taking. And security only leads to preservation, not growth. I decided both are equally important to me, so I decided on risking (on average) 50% of my capital on the best speculations I can find. Since the risk/reward of bitcoin is far superior than any other speculation I have seen, I choose to allocate almost everything of my risk capital to bitcoin.  

So if I end up losing 40% of my capital to bitcoin, I will feel bad, I will probably cry. And I will ask myself, was this really necessary? To take such a big risk? And my answer will be: it was a very good bet to take. A bet worth allocating a serious portion of my capital. But sadly it didn't work out. I will have to process the loss, cry it out, not self attack and move on, hopefully finding another opportunity and do exactly the same if the risk/reward looks also very good: Go for it. With my time, with my energy, and with my capital.  


What do you think of my defense? Is it making sense? Or do you see gaps in my reasoning?

[seleme]

No risk - no gain. If you are ready to risk and live dangerously,well, it's your money and go for it. Bitcoin is risky thingy, there is definitely chance you can make a killing with it but there's always a chance you could lose a lot.Up to each of us individually what to pick.

[RationalSpeculator]

Still with bitcoin around $150 today my return on my - complete - capital is 45% today, which is very respectable to me.

So, you don't stick to your system though you said not sticking to it caused mistakes.

Yes. I learned my lesson and am now sticking to my fixed allocation strategy much better.

I don't understand what you mean with your post?

Maybe I haven't understood good, English is not my native language. You said that your strategy is 40% in coins and I see that 45% there.

Oh yes, you thought I was again not sticking to my system I appreciate you point that out.

I meant to say I have 45% return on my capital today, and indeed have a target exposure of 40% to bitcoin. All the % makes it confusing I understand.

[RationalSpeculator]

No risk - no gain. If you are ready to risk and live dangerously,well, it's your money and go for it. Bitcoin is risky thingy, there is definitely chance you can make a killing with it but there's always a chance you could lose a lot.Up to each of us individually what to pick.

You summarize it shortly. I prefer to intellectualize matters in lengthy posts

How much percent do you allocate to bitcoin?