(SSS) - A Sane and Simple bitcoin Savings plan

[silversurfer1958]

silversurfer, I think your son has a better chance of a much greater return if he just forgets about those 0.1 bitcoins for a few years and doesn't sell any. Silver is a nice alternative but it's potential is so much lower than bitcoin it's not even worth discussing. Silver is great to hedge vs bitcoins but with a so small amount as 0.1btc it's just better to hold on imo.

He has 1.2BTC already I gave him, he's holding that, this 0.1BTC is really a little fun, get him used to thinking about money, investments, hedging strategies, discipline,  etc, and hopefully, he gets to stack a few shiny Silver coins, so this is just a bit of fun for him, if he did only have the 0.1 you'd be right, far better for him to hold.

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[GigaCoin]

I will explain my simple savings plan.

I am a student, so almost inherently constantly next to broke. Both in the real world, and the Bitcoin realm. I heard about Bitcoin long ago, didn't do anything with it, poor me. I heard about it again last week, and decided to invest. I have made 2 purchases, both €100,-. I made this small investments because I can miss them. Next time I have money to spare will be end of December, therefor what happens during the upcoming month is irrelevant for me. I will not sell, because I can miss the money I invested. When will I check out? I hope not before 5 years. When will I reinvest and what? As long as I believe in it I will invest money I can loose.

Don't worry you are not alone that way, according to various surveys the majority of GenY (21-35) are in huge debt or barely making enough money to get buy due to cost of living pressures. So whatever little you can put into Bitcoins will definitely help you improve your standard of living or paying off your debts.

Think of it this way, for example calculate how much you spend on useless stuff that you can cut on (expensive coffee, dining out, regular Gadget upgrades, fuel for excessive car trips etc) and cut down or eliminate them, take the same money and put into coins, that way you can put in even more money that you can afford to lose.

great post by reptila as usual 

[siggy]

I really like the 10% rake on every doubling...  I'm basically using that with a slight modification...

As doubles tend to be far and few between, I'm using a 1% rake on each 10% increase... Over the past couple days this has resulted in a bit of excess, however long term it seems to be working out fairly well....

Siggy

[Wary]

Great strategy, thanks a lot!

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.

So, the purpose of SSS is:
a) Spend some BTC on everyday life
b) Balance BTC risks with it's benefits by diversification.

Benefits of BTC are proportional to it's rate. So it makes perfect sense to schedule sells by the BTC rate.
But risks of BTC are proportional to time, rather than to rate, because whatever can happen with BTC, can happen any time, independently of the rate. So it would make better sense to schedule BTC sells by time, rather than by rate.

The same is about spending. To increase our living standards we need some regular income, while with the SSS it may be a number of BTC sales a month, followed by a half-year without any sales.

So, wouldn't it be better to sell, say, 1% a month, whatever the rate?

(Yes, we won't have benefits of ATH, but risk and income will be better spread).

[Zangelbert Bingledack]

The more I read reddit and the speculation forum, the more convinced I am that the logic of the OP needs to be internalized as part of every newbie's education. The Paradox of the Rake, to rename a point made by rpietila, is that performing proper rakes prevents panic selling.

"To hold onto your bitcoins through thick and thin, you must sell."

I think wide diffusion of this rake concept would significantly reduce volatility. This post or a similar one should be in the sticky at /r/Bitcoin, speculation forum stickies, youtube video (short visual one and longer, detailed one - James D'Angelo?), etc. It is critical investor knowledge and can be considered part of Bitcoin's educational infrastructure, in the sense of being a component that enables Bitcoin to take over the world faster (and happens to make Bitcoin investors richer vs. the Wall Street money that will pour in in 2014 and less stressed as a bonus).

Additionally, Risto's savings plan is not only a plan, but also solid grounds for analysis. Despite being only dimly aware of the rake concept, if at all, most early adopters have likely followed it to some (suboptimal*) degree simply because of the psychological factors at work when one is faced with the Bitcoin "binary bet." This provides the ultimate answer to those who worry of wealth concentration, as well as an underpinning for speculative analysis.

*Either taking on excessive risk or losing an excessive number of coins, or alternating between the two, and ending up much poorer than was possible, due to lack of conscious application of the rake.

[rpietila]

I am thinking that the initial buy-in should be DCA'd a little, even though it nets fewer coins, it increases investor confidence. What about the following idea:

- Invest first the amount that you can confidently lose without a blink. Regard this amount as lost.
- Repeat weekly until you haven't had the urge to buy more for several weeks
- All that money is lost, do not calculate its value every day, spend your time learning about bitcoin rather
- As long as you buy more, you don't sell any. This is a rule: earliest selling is 90 days after last purchase.
- Then only compile the SSS diversification plan and set the parameters.

[canth]

I think one of the toughest parts about the plan is the temptation to buy back in after a rake. Example:

- BTC briefly touches a new ATH at $1,000
- sell 10% for fiat
- BTC plunges to $500 a week later
- buy back in and hold for BTC to reach $1000

Assuming a strong belief that the new ATH is a realistic value for BTC, I for one would be very tempted to buy back in with the 10% I had just sold and wait again for BTC to double again.

[rpietila]

I think one of the toughest parts about the plan is the temptation to buy back in after a rake. Example:

- BTC briefly touches a new ATH at $1,000
- sell 10% for fiat
- BTC plunges to $500 a week later
- buy back in and hold for BTC to reach $1000

Assuming a strong belief that the new ATH is a realistic value for BTC, I for one would be very tempted to buy back in with the 10% I had just sold and wait again for BTC to double again.

There is a portfolio allocation strategy called PISTOL, in which you set the percentages for RE, stocks, bonds, cash and gold. Then you annually readjust the portfolio, which lets the winners run some time before buying more of the "undervalued" investments. The problem is that it basically gives you just a weighted return of those asset classes, and not more. It did not perform well in the simulations.

If you buy back after a turn to the downside, you essentially lose the hedging part and if you do it enough, you just waste all your cash (or whatever investments you have aside BTC) if BTC goes to zero. That is the risk we want to hedge against, not gamble with.

Of course there is the temptation to buy back. If that becomes too big, just set the rake-% lower. With 5% rake your portfolio tends towards 90% bitcoin 10% other. Another approach would be to rake constantly (but minute amounts) after minute increases in price, and then have a percentage drop (say, 25%) after which you start to buy back. Then you get to keep the top 25% regardless. I haven't simulated this yet maybe it's a stupid idea. However I'm pretty sure that most if not all people do better if the strategy does not allow leeway.

[Jutarul]

I think one of the toughest parts about the plan is the temptation to buy back in after a rake. Example:

- BTC briefly touches a new ATH at $1,000
- sell 10% for fiat
- BTC plunges to $500 a week later
- buy back in and hold for BTC to reach $1000

Assuming a strong belief that the new ATH is a realistic value for BTC, I for one would be very tempted to buy back in with the 10% I had just sold and wait again for BTC to double again.

In that case the SSS could be enhanced by a speculative component: 10% non-reversible rake and 5% reversible rake. The reversible rake would trigger a buy-back at a price point which e.g. is at half the price point at which it was used.

E.g. assume a (USD/mBTC) scenario by starting with 10 BTC ($10k USD) : 1->2->4->2->4

15% conventional rake strategy at each doubling: (USD/mBTC, BTC, USD)
1,  10, 0
2, 8.5, 3000
4, 7.225, 8100
2, 7.225, 8100
4, 7.225, 8100

10%nonrev/5%rev rake strategy at each doubling: (USD/mBTC, BTC, USD)
1,  10, 0
2, 8.5, 3000
4, 7.225, 8100
2, 7.650, 7250
4, 7.225, 8950

The 10% acts as a hedge, the 5% acts as a time-based arbitrage from which you gain additionally.

[rpietila]

The 10% acts as a hedge, the 5% acts as a time-based arbitrage from which you gain additionally.

Might you be able to simulate this with random price development? (I can only do it in Excel, and that way it'd take some time)

[Jutarul]

The 10% acts as a hedge, the 5% acts as a time-based arbitrage from which you gain additionally.

Might you be able to simulate this with random price development? (I can only do it in Excel, and that way it'd take some time)

From my experience buy-and-hold with a simple rake still offers the most gain for the least effort.

If you want to increase the gain via a time-based arbitrage you have to give up some of your longterm price appreciation for the benefit of short-term price fluctuations. It's always difficult to figure out which one is more attractive at certain times. If the price flatlines a reversible rake strategy with a small enough margin will do well. The problem is to be able to predict when the price flatlines and when it starts to rally. If you have too much of a rake involved and you miss the start of a rally, you basically forgo all the opportunity gains coming from that initial slope in the rally.

That said - a reversible rake strategy works best in a scenario where there are huge price inflations and deflations, as you accumulate fiat on the way up and btc on the way down without the need to call the bottoms or the tops. That said - I don't expect bitcoin to depreciate more then 10x anytime soon - other than becoming worthless because of some black swan event.

[Peter R]

The 10% acts as a hedge, the 5% acts as a time-based arbitrage from which you gain additionally.

Might you be able to simulate this with random price development? (I can only do it in Excel, and that way it'd take some time)

From my experience buy-and-hold with a simple rake still offers the most gain for the least effort.

If you want to increase the gain via a time-based arbitrage you have to give up some of your longterm price appreciation for the benefit of short-term price fluctuations. It's always difficult to figure out which one is more attractive at certain times. If the price flatlines a reversible rake strategy with a small enough margin will do well. The problem is to be able to predict when the price flatlines and when it starts to rally. If you have too much of a rake involved and you miss the start of a rally, you basically forgo all the opportunity gains coming from that initial slope in the rally.

That said - a reversible rake strategy works best in a scenario where there are huge price inflations and deflations, as you accumulate fiat on the way up and btc on the way down without the need to call the bottoms or the tops. That said - I don't expect bitcoin to depreciate more then 10x anytime soon - other than becoming worthless because of some black swan event.

We know volatility in excess of the frictional trading costs exists.  I think this suggests that a slightly more optimal strategy than the SSS must also exist.  Like some others have alluded too, it could be an SSS plan (with sells perhaps spaced every decibel, rather then every doubling), but, most importantly where you have a trailing bid at, say, -1.5dB below your last sell point.  

Think of it as an SSS plan  +  a money-pump harvesting the volatility that exists anyways.

I know Risto explained how the trailing bid removes some of your hedge, and I agree.  My counter would be that for a given level of retained bitcoin wealth should bitcoin hit $100,000, and an assumed level of volatility, there is a strategy that would produce a higher amount of "raked-USD" than the SSS should bitcoin fail before it gets to $100k+.  We just need to find what that strategy is.  Ever since I read about Risto's SSS plan, I've wanted to simulate this and some other ideas.  But, alas, my real job calls.....

[Aido]

Thank you for this savings plan Risto.

+1

[SlipperySlope]

I think one of the toughest parts about the plan is the temptation to buy back in after a rake. Example:

- BTC briefly touches a new ATH at $1,000
- sell 10% for fiat
- BTC plunges to $500 a week later
- buy back in and hold for BTC to reach $1000

Assuming a strong belief that the new ATH is a realistic value for BTC, I for one would be very tempted to buy back in with the 10% I had just sold and wait again for BTC to double again.

In that case the SSS could be enhanced by a speculative component: 10% non-reversible rake and 5% reversible rake. The reversible rake would trigger a buy-back at a price point which e.g. is at half the price point at which it was used.

E.g. assume a (USD/mBTC) scenario by starting with 10 BTC ($10k USD) : 1->2->4->2->4

15% conventional rake strategy at each doubling: (USD/mBTC, BTC, USD)
1,  10, 0
2, 8.5, 3000
4, 7.225, 8100
2, 7.225, 8100
4, 7.225, 8100

10%nonrev/5%rev rake strategy at each doubling: (USD/mBTC, BTC, USD)
1,  10, 0
2, 8.5, 3000
4, 7.225, 8100
2, 7.650, 7250
4, 7.225, 8950

The 10% acts as a hedge, the 5% acts as a time-based arbitrage from which you gain additionally.

I would allocate very little of the rake amount to buy-backs because otherwise a major benefit of SSS is forfeited - if bitcoin subsequently crashes to zero, buy-backs simply compound the loss. 

[BitDreams]

silversurfer, I think your son has a better chance of a much greater return if he just forgets about those 0.1 bitcoins for a few years and doesn't sell any. Silver is a nice alternative but it's potential is so much lower than bitcoin it's not even worth discussing. Silver is great to hedge vs bitcoins but with a so small amount as 0.1btc it's just better to hold on imo.

He has 1.2BTC already I gave him, he's holding that, this 0.1BTC is really a little fun, get him used to thinking about money, investments, hedging strategies, discipline,  etc, and hopefully, he gets to stack a few shiny Silver coins, so this is just a bit of fun for him, if he did only have the 0.1 you'd be right, far better for him to hold.

Great and fun idea!

[l0os3]

The fact that I mined in 2011 and sold when it crashed hurled me into a deep depression I wish I would have looked
At this as an opportunity to invest and not so much a get rich quick scheme.

Thanks for the post!

[Butters]

Hello Op, thank you very much for this thread. I want your honest answer to 1 question. With all your knowledge of bitcoin, from 0 to 100 what would be your honest guess about the probability of mBtc getting to 1000usd, and the probability of crash and burning.

What about the probability of going higher, but not as high as 1kusd per mBtc, before maybe slowly dying / being replaced / etc?.

Thank you.

[rpietila]

Hello Op, thank you very much for this thread. I want your honest answer to 1 question. With all your knowledge of bitcoin, from 0 to 100 what would be your honest guess about the probability of mBtc getting to 1000usd, and the probability of crash and burning.

What about the probability of going higher, but not as high as 1kusd per mBtc, before maybe slowly dying / being replaced / etc?.

I was about to write concerning this matter. So the answer is the OP in the new thread.

[Zangelbert Bingledack]

De-raking

If the goal is to maintain 80% of your portfolio in Bitcoin, what do you do when the price falls a lot (for a non-catastrophic reason)? If you had $80,000 in BTC and $20,000 in fiat, then the price halved, you'd now have $40,000 in BTC and it'd only be about 67% of your portfolio. Wouldn't you want to buy back enough BTC to bring the ratio back to 80/20?

Obviously there are limits to how low you'd go with this, but does this have any use or does even any rebalancing on price dips ruin the whole point of the rake/hedge?

[bluemoon]

De-raking

If the goal is to maintain 80% of your portfolio in Bitcoin, what do you do when the price falls a lot (for a non-catastrophic reason)? If you had $80,000 in BTC and $20,000 in fiat, then the price halved, you'd now have $40,000 in BTC and it'd only be about 67% of your portfolio. Wouldn't you want to buy back enough BTC to bring the ratio back to 80/20?

Obviously there are limits to how low you'd go with this, but does this have any use or does even any rebalancing on price dips ruin the whole point of the rake/hedge?

Depends how well you want to sleep at night

Rebalancing is a different strategy and trades the possibility of gains for the possibility of the total loss of your portfolio.

Either way you should have a plan and stick to it: then you can benefit from the positive feeling of decision rather than the weak feeling of indecision.