(SSS) - A Sane and Simple bitcoin Savings plan

[rpietila]

This also raised a concern: Since people will mostly invest only once in their life and then start to cash out slowly afterwards, soon there will be less and less people buying bitcoins every year

The cashout speed is relative to value appreciation (in the hypothetical world where all current holders are SSS'ing). So only if there is demand, will the price go up, and the supply will come. Price will not go down because nobody sells to the falling market, as they have already sold to the rising, and are comfortable.

Using the 10% rake example, we can easily calculate how many dollars will need to be invested for the price to go up by the target, 1000x. How? The investment of the new entrants is equivalent to the rake of the current holders. (Should I use dividend instead of rake??) In the first runup from $1 to $2 per mBTC, 10% of all existing bitcoins are sold at an average price of about $1.4. This results in a $1.7B rake for old holders, which comes from new investors' pockets. The bitcoin market cap is raised by $12B.

The (new investment)/(rise of market cap) ratio is therefore about 14%. Loger term, this ratio has been about 25% on average. In steep runups, it gets lower and during prolonged plateaus it is higher. It is advisable to sell more when the price is trending higher, and refrain from selling altogether if it does not rise.

Like I said before, the best advice I can give to new investors (advice value is high, because it is so far from the usual new investor pattern):
- Buy sooner than you are comfortable (right now is best, dollar cost averaging sucks bad since bitcoin rises 400%-10,000% per year so far)
- Buy with less money than you normally invest (you can buy more later, but most will not need to)
- Set a rake % that suits your preference (10-20% is usually best, consult the tables)
- Decide when to start raking/cashing out/diversifying (skipping the first 1 or 2 let you retain much more coins, but make the decision now, not according to circumstances)
- Stick to the plan. It is a speculative investment from dollar point of view, and no matter how high it goes, you should not go emotional and stop selling. Also if it goes lower, you should not try to cash out. Also make a new purchase only after careful thinking since it may go to zero and the idea of rake is that you win money regardless, not lose it.


**

I understand, this kind of mathematical talk is so intimately similar to a pyramid scheme, perhaps it's good to link to a lengthy treatise of mine, explaining how Bitcoin is not a ponzi, or a pyramid scheme, but a revolutionary technology whose value is correlated to the userbase, which means that it is on its way to become a self fulfilling prophecy where the value of the network grows faster than the money invested.

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[maurya78]

Wow, just wow

Thanks for this brilliant articulation

[btc4ever]

dollar cost average.  buy same amount every week.   Also, hold your bitcoins locally.  Online wallets and exchanges can and have disappeared, been hacked, etc.

[merkin51]

rpietila, would you also suggest this kind of plan for Litecoin (perhaps on a smaller scale right now)?

[rpietila]

dollar cost average.  buy same amount every week.   Also, hold your bitcoins locally.  Online wallets and exchanges can and have disappeared, been hacked, etc.

Thank you for your feedback, but:

NO. DO NOT "DOLLAR COST AVERAGE", SINCE IT LEADS TO A MARKEDLY WORSE RESULT IN EVERY SCENARIO WHERE BITCOIN CONTINUES APPRECIATING AGAINST THE DOLLAR AS HAS ALWAYS BEEN THE CASE SO FAR.

Other points are correct.

[rpietila]

rpietila, would you also suggest this kind of plan for Litecoin (perhaps on a smaller scale right now)?

It is the standard plan for all kinds of high-risk events that can be reduced to either going up or crashing. For LTC it works exactly same way, you just need to do your homework to find the target value for LTC (or make the plan open-ended so that you always sell if it goes up more, and always hold some of the bag if it goes to zero).

I think LTC is overvalued at 0.01344, it does not offer anything compared to BTC, and it cannot be used anywhere. The whole community seems to consist of pump and dumpsters. I think the risk/reward is just not there compared to BTC.

- With Bitcoin (compared to fiat), you have (nearly) unlimited reward, compared to limited risk (all of your investment, but not more).

- With Litecoin (compared to Bitcoin), you have limited reward (small potential of a sustained LTC/BTC rate increase), compared to unlimited risk (much higher probability of going to zero, or orders of magnitude down).

[rpietila]

phelix comment deleted due to intentional snipping quote out of context. The minimum honest quote is one sentence between two periods, not a string of words in between, as a long time member you should know it. Do not post again. There are other threads for:
- strawman arguments.
- discussing whether bitcoin can possibly hit $1M or not.

Thank you.

[rpietila]

Thanks again for the answers.

I think you missed one of my questions (i added it late by edit)

"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?"

Would love to hear your take on silver vs gold since I'm currently un-decisive on buying more silver or gold.

Thanks.

I don't think it really matters. Both will do bad if bitcoin rises. If the crypto genie can be put back in the bottle, the world will be a sad place anyway and both g&s will have their uses. Considering that gold market cap is >> silver's, I would overallocate in silver. The point is to acquire stuff that would do well if bitcoin is destroyed. Nobody cares your gold or silver if bitcoin does rise to $1M. This is called diversification.

[ErisDiscordia]

Thanks for writing all of this and sharing it with us Risto!

I will be showing this to all of my friends, who started contacting me lately because of BTC.

The nice thing is they can now buy at the ATM instead having to go through the hassle of exchanges As you mention, with the average speed of appreciation being so high, every day of delay of your initial investment is quite significant, so great to have the ATM.

[BitThink]

This is a wonderful plan and can effectively remove emotional trading, which is the main reason causing loss for non-professional investors like us.

There's only one question: there's no stop loss policy. So if BTC never reaches the price where we can get the original investment back by selling and then goes to 0, we will definitely lose most of the investment because we cannot sell any more. In extreme case, if BTC never reachs $2000 and goes to 0, we have no chance to get money back. Even if it reaches $2000, we cannot get much from it if it never reaches $4000 later.

Any thoughts? Is this plan completely based on the assumption that BTC will keep exponentially increasing for a while and never goes to 0? Should we set up a stop loss policy so that we can at least get something back in the real crash?

[rpietila]

NO. DO NOT "DOLLAR COST AVERAGE", SINCE IT LEADS TO A MARKEDLY WORSE RESULT IN EVERY SCENARIO WHERE BITCOIN CONTINUES APPRECIATING AGAINST THE DOLLAR AS HAS ALWAYS BEEN THE CASE SO FAR.

This requires proof. I downloaded the longest timeseries of Bitcoin trading activity available (Mt.Gox USD), and set the following:

A person wants to invest $1,000 in Bitcoin, and has the following options:

- Invest it all now, at an average price this week.
- Invest it in 4 equal lots in 4 subsequent weeks, starting this week.
- Invest it similarly over 8 weeks
- Over 12 weeks.
- Over 26 weeks (6 months)
- Over 52 weeks (12 months).

Then I calculated, how many bitcoins can be gained/lost by spreading the purchases. Result:

On average, by buying all instantly, the following advantage over other options was gained:

4 weeks = +8%
8 weeks = +20%
12 weeks = +33%
26 weeks = +79%
52 weeks = +161%.

In some cases DCA does come out ahead. In the 10% cases that most favored DCA, their advantage was (negative sign=DCA advantage):

4 weeks = -13%
8 weeks = -22%
12 weeks = -31%
26 weeks = -30%
52 weeks = -46%.

On the other hand the 10% most favorable cases for instant buying yield the following:

4 weeks = +33%
8 weeks = +77%
12 weeks = +101%
26 weeks = +214%
52 weeks = +416%.

By dollar cost averaging, the most would have been gained by having a 52-week plan instead of an instant lock-in in the week of 6.6.2011. (-77% less coins for instant).

By buying instantly, the largest advantage over DCA would have been by buying in the week of 27.9.2010 instead of during the following year (+629% more coins).

[rpietila]

This is a wonderful plan and can effectively remove emotional trading, which is the main reason causing loss for non-professional investors like us.

There's only one question: there's no stop loss policy. So if BTC never reaches the price where we can get the original investment back by selling and then goes to 0, we will definitely lose most of the investment because we cannot sell any more. In extreme case, if BTC never reachs $2000 and goes to 0, we have no chance to get money back. Even if it reaches $2000, we cannot get much from it if it never reaches $4000 later.

Any thoughts? Is this plan completely based on the assumption that BTC will keep exponentially increasing for a while and never goes to 0? Should we set up a stop loss policy so that we can at least get something back in the real crash?

Stop loss is a tool for suckers. This plan assumes that you invest what you can afford to lose. One of the most important features is that you never sell when prices are trending down. That will soon reverse the trend and keep your coin stash intact.

If you are the type that thinks in dollars and wants to cash out the original investment, I suggest the following:
at $2, do no sell
at $4, sell the original amount (which is 25% of your bitcoins now) Now you are clear.
afterwards, sell according to your rake.

If this is too risky for you, you are investing too much. Think again with a smaller initial sum.

Many forum frequents actually have too much % of portfolio in bitcoin now, after the recent runup. If you are 10% rake type of guy, it means you should have $20,000 worth other financial wealth per every BTC100. If your rake is 20%, you should have $50k per every BTC100. If not, then sell! Congratulations! You have already completed the initial doublings of your plan

[BitThink]

This is a wonderful plan and can effectively remove emotional trading, which is the main reason causing loss for non-professional investors like us.

There's only one question: there's no stop loss policy. So if BTC never reaches the price where we can get the original investment back by selling and then goes to 0, we will definitely lose most of the investment because we cannot sell any more. In extreme case, if BTC never reachs $2000 and goes to 0, we have no chance to get money back. Even if it reaches $2000, we cannot get much from it if it never reaches $4000 later.

Any thoughts? Is this plan completely based on the assumption that BTC will keep exponentially increasing for a while and never goes to 0? Should we set up a stop loss policy so that we can at least get something back in the real crash?

Stop loss is a tool for suckers. This plan assumes that you invest what you can afford to lose. One of the most important features is that you never sell when prices are trending down. That will soon reverse the trend and keep your coin stash intact.

If you are the type that thinks in dollars and wants to cash out the original investment, I suggest the following:
at $2, do no sell
at $4, sell the original amount (which is 25% of your bitcoins now) Now you are clear.
afterwards, sell according to your rake.

If this is too risky for you, you are investing too much. Think again with a smaller initial sum.

Many forum frequents actually have too much % of portfolio in bitcoin now, after the recent runup. If you are 10% rake type of guy, it means you should have $20,000 worth other financial wealth per every BTC100. If your rake is 20%, you should have $50k per every BTC100. If not, then sell! Congratulations! You have already completed the initial doublings of your plan

Great. That will be a safer plan for those who invested most of their savings.
I personally have only spent less than 15% of total investment. Maybe too conservative, but too much risk may ruin my sleep time:)

[tonico]

This is a just for fun implementation in Pyhton, probably a bit over-engineered 

You can change the parameters in main() or write an argument parser.

$ python -m sssplan
 Price  mB left  mB sold  k$ out  mB val.  k$ sum  total val.
    2   9000     1000       2       18       2       20
    4   8100      900       4       32       6       38
    8   7290      810       6       58      12       70
   16   6561      729      12      105      24      129
   32   5905      656      21      189      45      234
   64   5314      590      38      340      83      423
  128   4783      531      68      612     151      763
  256   4305      478     122     1102     273     1375
  512   3874      430     220     1984     493     2477
 1024   3487      387     397     3570     890     4461

Code:

def iter_price(initial_price, steps, base=2):
    for i in steps:
        yield initial_price * base ** i

def iter_mbtc_left(initial_btc, rake, steps):
    base = (1 - rake)
    for i in steps:
        yield initial_btc * base ** i

def iter_mbtc_sold(initial_btc, rake, steps):
    piece = initial_btc * rake
    base = (1 - rake)
    for i in steps:
        yield piece * base ** (i - 1)

def iter_kusd_out(mbtc_sold, price):
    for mbtc, usd in zip(mbtc_sold, price):
        yield mbtc * usd / 1000.

def iter_kusd_sum(kusd_out):
    s = 0
    for kusd in kusd_out:
        s += kusd
        yield s

def iter_mbtc_val(mbtc_left, prices):
    for mbtc, price in zip(mbtc_left, prices):
        yield mbtc * price / 1000.

def iter_total_val(mbtc_val, kusd_sum):
    for item in zip(mbtc_val, kusd_sum):
        yield sum(item)

def main():
    base = 2 # doubling
    numof_steps = 10
    initial_price = 1 # kUSD
    inital_btc_stash = 10000 # mBTC
    rake = 0.1

    steps = range(1, numof_steps + 1)
    prices = list(iter_price(initial_price, steps, base=base))
    mbtc_left = list(iter_mbtc_left(inital_btc_stash, rake, steps))
    mbtc_sold = list(iter_mbtc_sold(inital_btc_stash, rake, steps))
    kusd_out = list(iter_kusd_out(mbtc_sold, prices))
    mbtc_val = list(iter_mbtc_val(mbtc_left, prices))
    kusd_sum = list(iter_kusd_sum(kusd_out))
    total_val = list(iter_total_val(mbtc_val, kusd_sum))

    print ' Price  mB left  mB sold  k$ out  mB val.  k$ sum  total val.'
    fstr = ' {0:4} {1:6.0f} {2:8.0f} {3:7.0f} {4:8.0f} {5:7.0f} {6:8.0f}'
    for args in zip(prices, mbtc_left, mbtc_sold,
                    kusd_out, mbtc_val, kusd_sum, total_val):
        print fstr.format(*args)

if __name__ == '__main__':
    main()

[alexeft]

Stop loss is a tool for suckers.

Out of curiosity, would you say the same for the forex market with magin and leverage?

Yes: Forex market with margin and leverage is a tool for suckers.

And pros. By pro I mean "full-timer with 10 years of experience".

 

Indeed!

[wachtwoord]

Many forum frequents actually have too much % of portfolio in bitcoin now, after the recent runup. If you are 10% rake type of guy, it means you should have $20,000 worth other financial wealth per every BTC100. If your rake is 20%, you should have $50k per every BTC100. If not, then sell! Congratulations! You have already completed the initial doublings of your plan

Selling now would physically hurt me

And what the hell would I do with the fiat anyway? If you have no direct expenses to use it on therefore no reason to sell. I use my liquid fiat for all current expenses and manage to do so quite easily.

When my Bitcoin holdings become valuable enough to completely discontinue earning money through work, I will probably continue to hold the majority of my worth in Bitcoin. I might diversify a little (to reduce the chances of having to discontinue my retirement) but definitely not into fiat (I would expand my stock portfolio if the price is right).

[Sindelar1938]

This is brilliant

Will be referencing this, that's for sure

[BitDreams]

Just to clarify, I signed up for Coinbase and they limit purchases to 10 until you are completely verified. The first couple of months they had shortage issues. Only so many coins available and they went first come, first serve. So they didn't have inventory. What I should have done is use localbitcoins to get my initial purchase but I had in mind only trusting coinbase. If I had it to do all over again I would have the quantity of coins I wanted. As it stands, I have half my original quantity at more than double the price I would have paid if I had just gone and found the supply instead waiting for Coinbase to get up to speed.

I don't have that problem with Coinbase now, so if you are happy with a ten coin limit per day and a fifty cap on coins per week, they are fine. All in all, I like Coinbase, they just din't allow me to purchase as many as I wanted as quick as I wanted. This is why I took the accumulation route.

[troy112]

I must say great plan, best of all its simple and if you invest only what you can lose. You can even stop looking at prices every time and get some sleep...
Thx for sharing

[Dafar]

OP... I bought 10 BTCs for about $6900 and I don't want to look back until 2015




$6.9k is not something I can "afford to lose" since it's pretty much most of my savings at this point... but I am single, have no debts and have a job so incase bitcoins really pick up I want to take that risk of losing ~$7k when I can potentially become a millionaire. Do you think this is stupid of me? And how confident are you on the success and mainstream adoption of Bitcoin? I just want your opinion since you sound pretty smart.