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Author Topic: (SSS) - A Sane and Simple bitcoin Savings plan  (Read 83697 times)
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rpietila
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November 24, 2013, 03:49:43 PM
 #1

This topic is unique among my many informative threads. It was reddited twice and received over 5,000 readers in the first 24 hours. Thank you!


Introduction

Bitcoin has made many rich. Consider the guy who sold two pizzas for BTC10,000. The about $20 investment has turned to $10 million - a nice 500,000x gain in less than 4 years. But what if he sold it all when the price first doubled? Then instead of millions, he would have netted $20.

Even worse, some have actually lost money with bitcoin. Buying at the tops and selling at low points is the fate of many who do not have any strategy in their actions.

It is also actual money that you lose if you do not buy, or buy with a smaller amount than you could have bought, or at a higher price than you could have bought, considering the circumstances. All my friends would have become $millionaires by now, had they acted rationally since the day the heard about Bitcoin. Even I would probably have 2-10x more coins with no corresponding increase in risk.  

The past cannot be changed, but there are enough gains waiting for us in the future to amply reward those who care to exercise their logic and invest rationally.


Bitcoin is a disruptive technology that has the potential to change the world even more than the Internet has done. If this indeed happens, the inbuilt dynamics make it happen relatively soon (by the end of the decade, at maximum). In this scenario, the value of the currency unit will have increased really much. The pizza is quite near the low-water mark of bitcoin trades, and the 500,000x gain since it, can be taken as the bitcoin value appreciation until now.

How much can bitcoin go up from here? A few months ago I had a strong realization that bitcoin's market cap could reach that of gold, which would translate to $300,000 per unit. That would be a mere 300x increase from current levels. Considering that 12-months trailing average shows almost 100x, this could conservatively be achieved in 2016, realistically in 2015 and possibly in 2014. A longer-term trendline analysis extrapolated, shows 8/2016.

But going even further, comparing Bitcoin to gold (borrowing the analogy from Zangelbert), would be akin to comparing email to postal letters. The new technology not only effectively replaces the old, but also brings so many other benefits that you cannot imagine them before seeing. In email's case, you could for example link all information in the world to your post, it would reach the recipient instantly, and not cost anything. Bitcoin does the same to something that is way bigger than the industry of delivering mail - the monetary system. A comparison to gold is probably not at all enough. The comparison to all dollars, all fiat currencies, or all liquid financial instruments may still be an underestimate. On the other hand, if something so good happens to the debt-ridden world, even those who did not buy any bitcoins, are mostly better off.

Then there is the flipside of the coin: the disruptive technology is still on beta. So far all is fine, but nobody gives any guarantees. Despite that by reading about Bitcoin you gain more confidence towards it in all levels, there still are many known threats and dangers, technical and political, and sometimes also unknown things happen. Unbelievably few understand bitcoin even now. It is an unknown thing to them. To keep things simple, we postulate that Bitcoin is in a constant danger of self-annihilating, and its exchange value going to zero. This is not necessary the most realistic negative option, but serves as a good counterweight to the mindblowing positive case.


SSS System

In investing Bitcoin, the odds are so much on your side that there is no reason to take any risks. If it goes up, any number of bitcoins makes you rich, and even if you have zero, you will still be richer than before Bitcoin (I do not own any shares of Facebook, but acknowledge its importance and the benefits that I get for free). If it goes down, you should only lose slack money, money that you did not need anyway. You cannot lose more than you put in, so don't put in more than you can afford to lose and you'll be all right, even in the most negative case.

First you need to find out how much you have. To keep keeping things simple, take first aside all the things that you need. They are not counted. Then calculate the resale value of the rest of your things, subtract all debts, and you find your financial net worth. Since house is so big, you should count house equity toward the total, but if you prefer thinking it as separate, you can also decide that you 'need' it and not count it. In this case, do not subtract the mortgage either.

Then you select the rake. You know the concept from poker establishments: some percent of all winnings goes to the house. With bitcoin we except great gains, so we want to 'tax' them to increase our living standard, or just to keep some diversified in case the negative event happens and bitcoins lose their value. The rake is the percentage to set aside, every time that the price doubles. If for example you select 10%, this will lead that 20% of your portfolio is in non-bitcoins and 80% in bitcoins. If you select 20%, the result is 40% in bitcoins/60% non-bitcoins.

For most of us, the previous percents sound extreme. But they are my recommendations. Remember, you do not need to invest more than you can afford to lose. In purist case, selecting a 10% rake would require you to invest 80% of your liquid wealth in bitcoins. But if that does not feel comfortable, you can invest 10% instead. In this case you can boost the accumulation by not raking your pot in the first doublings, only after it has increased to your target of 80% of your financial net worth.

The price now is about $1 per mBTC. (It is very much likely that we will spontaneously revert to mBTC when the average investment is no more even one bitcoin. So let's start it now.) First doubling is at $2, then at $4, $8, $16, $32, $64, $125, $250, $500 and $1000. So there are 10 doublings in total, which take the price up 1,000x. In the end, one bitcoin is worth $1 million, and one dollar is worth quite much less than it is now. The plan ends there because the world will look very much different. Before that, you stick to the plan: if it goes to zero, you net a small gain or a small loss.

Let's take an example of a person who only now finds bitcoin, has $50k in liquid assets, but is unwilling to risk more than $10k. His rake level is 10%, which starts immediately.

Code:
Price mB mB k$ mB other total BTC%
left sold out val. val. value
2 9000 1000 2 18 42 60 30 %
4 8100 900 4 32 46 78 42 %
8 7290 810 6 58 52 110 53 %
16 6561 729 12 105 64 169 62 %
32 5905 656 21 189 85 274 69 %
64 5314 590 38 340 123 463 74 %
125 4783 531 66 598 189 787 76 %
250 4305 478 120 1076 309 1385 78 %
500 3874 430 215 1937 524 2461 79 %
1000 3487 387 387 3487 911 4398 79 %

The important parameters are:
- Purchased 10,000mBTC, in the end he still has 3,487mBTC.
- Recovered initial investment of $10k in full when mBTC hits $8.
- In the end his fiat+other stuff stash is worth $0.9 million.


Discussion and tweaks

It is important to buy in as soon as possible, because waiting has in general not been a good strategy with bitcoin. Even if price drops afterwards, you should not feel any remorse at all - we are counting towards $1 million or nothing. If 'nothing' happens, you lose as many dollars, regardless of purchase price. If $1 million happens, then yes you have a smaller number of coins, but think how many are not even reading this advice, much less acting on it! Buy, and do it now. And only with funds that you can afford to lose. If you buy, and it crashes, but you have gained more determination that it is a good thing in the meanwhile, you can buy more.

When the plan is underway, and it crashes, I don't advice to buy back. Enjoy your rake rather. Bitcoin may continue to go down, you don't know it. Even if it goes to zero, you will have gained. If you need to pay taxes on the realized gains (as most of us do), it makes even less sense to go in and out.

If you want to daytrade, do it entirely separate from this, so that your daytrading has no effect on the execution of SSS plan and vice versa. In the end you will see, which one was more profitable and better use of time.

It is possible to make the selling effectively continuous, instead of discrete. You just send 10% of your coins to an exchange and divide the next doubling to small enough increments (say, 10 of them) and list your coins for sale. This way you get to sell every time the price rises to a new ATH. Because ATH's happen on times when Bitcoin is ahead of the trend, the timing of the selling is better than average.

It is entirely your own decision, how to allocate the non-bitcoin portfolio. Local differences dictate the prudent course of action.
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November 24, 2013, 04:13:47 PM
 #2

Great post. As usual. Deeply appreciated.
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November 24, 2013, 04:20:36 PM
 #3

wow THANK YOU!

once I sold, now I hold: 1NmPGsSFQdRYbBQbYyBhVs7aiqYF7mpbAB
Buy Bitcoins: https://coinbase.com/?r=525e03600349f76de2000115
Buy Gold & Silver with Bitcoins: https://www.goldsilverbitcoin.com/index.php?plugin=wafp&controller=links&action=redirect&l=6&a=thetopham
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November 24, 2013, 04:26:18 PM
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The key here is investing the total amount of what one is ready to risk from the start rather than going gradually over time.
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November 24, 2013, 04:26:50 PM
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Thank you for infromations. Smiley
Very good post. Cheesy
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November 24, 2013, 04:27:13 PM
 #6

Always a pleasure reading your posts.
Cheers.

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November 24, 2013, 04:27:26 PM
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A nice post and a good read. A genuine question though, does anyone really expect Bitcoin to ever go above 2 or $3k? That's only the first of 10 doubling stages with this plan. I appreciate that the plan in general is a nice, sensible programme to follow, however.
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November 24, 2013, 04:34:19 PM
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does anyone really expect Bitcoin to ever go above 2 or $3k?

This, grasshopper, you must discover for yourself.

MahaRamana
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November 24, 2013, 04:38:55 PM
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A nice post and a good read. A genuine question though, does anyone really expect Bitcoin to ever go above 2 or $3k? That's only the first of 10 doubling stages with this plan. I appreciate that the plan in general is a nice, sensible programme to follow, however.

Yes many people expect it to go beyond 10k
Your question was asked at the 1 USD level, 5 USD level, 10 usd etc...
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November 24, 2013, 04:39:05 PM
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They really need to hear this over on /r/Bitcoin. It is flooded with newbies who have no idea what they're doing. They'll be scared of their own shadow if they put in a few grand and don't have a plan.
rpietila
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November 24, 2013, 04:39:27 PM
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The key here is investing the total amount of what one is ready to risk from the start rather than going gradually over time.

I accumulated bitcoins until May, this year. Now I am dishoarding.

I think if you start now, the wisest choice is to buy as much as you dare (spread it over 3-6 months, maximum, if sum is really large) and then diversify according to the plan.

Actually what matters is the number of bitcoins. Those with 1-digit number of them are rich, 2 digits are super rich, 3 digits are hyper rich and 4 digits are ultra rich when 1 bitcoin is equivalent to millions of today's dollars.

An alternative way to this savings plan is just to buy a required number of bitcoins and put it into a paper wallet. But this is not so good because the value involved is so high that you better start preparing your new life already. It can be achieved with periodical dividends from the bitcoin stash, which gradually get bigger and enable you to upgrade your standard of living, etc. gradually.

Whether you are free or not is really not about money. I fully believe that 1 bitcoin is enough freedom what comes to money, if bitcoin truly takes off. There will mathematically never be more than 2 million holders of 1 bitcoin. (See this for discussion.) For comparison: there are 29 million dollar millionaires in the world now.
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November 24, 2013, 04:45:29 PM
 #12

Thank you for this, will put it to use.

As someone who also would like to start building a position in silver, what % of net worth or at least % of mbtc increase dividend brackets should one dedicate to silver?

Cheers, always enjoy reading your input.

Edit:  It's a silly question considering differences in personal situation / location and understand if it's unanswerable
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November 24, 2013, 05:23:56 PM
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The key here is investing the total amount of what one is ready to risk from the start rather than going gradually over time.


An alternative way to this savings plan is just to buy a required number of bitcoins and put it into a paper wallet. But this is not so good because the value involved is so high that you better start preparing your new life already. It can be achieved with periodical dividends from the bitcoin stash, which gradually get bigger and enable you to upgrade your standard of living, etc.

First, good thread. I was wondering what you actually mean by it not being wise to put your coins in a paper wallet and just forget about them? I'm assuming you mean that one day you will wake up being very rich and that will be somewhat of a shock and may not end well. Like someone winning the lotery? Is this what you mean or am I misunderstanding you? I'd like to add that for many people just forgettng about your coins now will be a much better strategy since the biggest challenge (if bitcoins do go to 1M) is not selling a majority of the coins way to early. For example I've already heard of people seelling entire holdings in this last run up in price.

Considering the above I guess one could say having a set strategy like you outline is incredibly valuable. You just have to be entirely confident that you will follow it.

rpietila, I'd also like to hear what you think your non bitcoin investments should consist of? What percentages would you allocate to gold, silver, stocks, bonds, cash etc?

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tomato22
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November 24, 2013, 05:58:21 PM
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Very nice guide, great ideas. I know I will be using some of it!
Thanks
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November 24, 2013, 06:21:12 PM
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Quote
In purist case, selecting a 10% rake would require you to invest 80% of your liquid wealth in bitcoins. But if that does not feel comfortable, you can invest 10% instead. In this case you can boost the accumulation by not raking your pot in the first doublings, only after it has increased to your target of 80% of your financial net worth.

Excellent timing advice! I will not be needing a rake for a while it seems, but that is what I've been expecting.
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November 24, 2013, 06:34:24 PM
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I was wondering what you actually mean by it not being wise to put your coins in a paper wallet and just forget about them? I'm assuming you mean that one day you will wake up being very rich and that will be somewhat of a shock and may not end well. Like someone winning the lotery?

Yes. I think most people enjoy periodic cashouts and gradual increase of lifestyle more than a huge all-in gamble with the intention to cash out $100 million in one swoop or nothing.

The parameters of the savings plan (initial investment, rake%, and when to start raking) should be simulated beforehand. This way you can plan for all possible outcomes before even committing any money, and you are then much better equipped to withstand the exchange rate fluctuations. It is like flying autopilot. Also you can see that you will not become rich if you commit $100 and insist on 30% rake. If, on the other hand you commit $1,000 and rake is 0% (same as putting all in paper wallet) you will become rich.

Quote
rpietila, I'd also like to hear what you think your non bitcoin investments should consist of? What percentages would you allocate to gold, silver, stocks, bonds, cash etc?

There are two forces at work,

- What you want;

- What acts as the best diversification if Bitcoin fails.

What you want part is that you buy all the things that keep their value and increase your satisfaction, such as cars, houses, collections of exotic spirits, etc.

Diversification is instruments, which appreciate in value if Bitcoin fails. These are currencies and precious metals, financial instruments etc.

I personally seek quality real estate, and I like silver, because it is really cheap and used to be the lynchpin of global monetary system before Bitcoin. I don't like gold so much, but that is easier to sell than silver if need be (in this plan you never sell anything (except bitcoins), just buy. I don't have much currencies, but they are not necessary bad. I just abhor having positive balance in my account as much as having a negative one.
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November 24, 2013, 06:46:45 PM
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I personally seek quality real estate, and I like silver, because it is really cheap and used to be the lynchpin of global monetary system before Bitcoin.

Exactly what I figured I will do in the future. I take this as further confirmation that I should stick to that plan. Grin
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November 24, 2013, 06:51:09 PM
 #18

Hi rpietila,

congrats on a great savings plan. Really nice one.  Smiley


I have another one if you would like to comment. It is intended for people who already save some money every month.
They could save a small part of that (say $100 per month) into bitcoin.
The difference would be that they wouldn't have to suffer inflation but rather deflation for the bitcoin part of their savings.

If for example over a 30 year period we have 5% yearly inflation, while bitcoin has 3% monthly deflation (being ultra conservative here),
the difference after 30 years would be astonishing!!!

Please feel free to comment. Or whoever else wishes to.

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November 24, 2013, 06:53:05 PM
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For the past couple of years I've been glancing at real estate from time to time. This last week I noticed I moved my search a decimal point over.

Edit: alexeft, this is what I've been doing since February. I used to know my average cost but I have not looked at the calculation in more than a few months.
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November 24, 2013, 06:57:19 PM
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Thanks for the swift and thorough reply.

Have another question. If one uses your adviced strategy of cashing out (rake) at set intervalls should one not take the exponential trend line into account? Let's say we are well behind the trend and we just hit a target. Is it really wise to sell 10% in this case? If you answer no I'm thinking one has to set some exception rules to the outlined plan before hand.

Edit: You say you like silver more than gold based on history but at the moment it seems to me that silver is a pretty dead monetary metal. No central banks are holding silver for example. The gold to silver ratio of bellow 30 came at times silver was a monetary metal backed by governments. Doesn't this feel like a less likely scenario now?

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