Topic: My bitcoin investment strategy - fixed allocation - listening to ALL your parts - page 2. (Read 5573 times)

Man, don't let greed to take over, and don't fool yourself. BTC has high rewards because it's very risky. That's why allocating 50% of your resources might not be wise. Sure, it depends on your situation, for some risking 80% of their resources could be worth it (because they're young and they can make back that money working quite easily, or because they don't have a family to look after), but for the average joe an exposure of 40%/50% to BTC is not wise.

You take for granted BTC will tenfold again - sure, we all agree is probable, but you must acknowledge it's also very possible it goes to 0.

And you may just be happier working on some real economy unrelated to pure speculation, while holding a BTC stash you're confident with, not constantly checking for the exchange rate

Very good tip. Thanks for your validation.

Sounds like a more robust strategy to me. I'd feel strange reducing my exposure to bitcoin to just 13% in the heights of a roaring bull market though. One thing I consider you haven't mentioned (and maybe you don't care) is I try to avoid taking a nominal cash profit and creating a taxable event while we're still in the early years for bitcoin. If this thing is as great as we think it is we should be able to do the Warren Buffett move and just hold forever. Eventually we can take out fiat loans for living expenses at a lower interest rate than the expected rate of return of the cryptocash holdings thereby paying no taxes and not reducing our earnings as it appreciates.

I've been thinking more about my fixed allocation strategy and the doubling down into ruin can simply be avoided by creating a limit to how much can be bought.

For example, I plan to scale up my exposure to 50% bitcoins if it gets highly oversold again comparable to the crash in 2011 around $3. However, once I bought this 50% I must stop and never buy again. So that if this time bitcoin does not recover and continues to go down, and my exposure becomes less than 50% again, I stop buying so that I cannot lose more than 50% of my capital.

I think I can do the same to the upside. I plan to reduce my exposure to 13% again if bitcoin goes into highly overbought territory comparable to 2011 and recent 2013 bubble, but since it is bitcoin it is theoretically possible that it goes up a lot more sometime in the future, never to go back to current levels again. So I can also put a limit on how much bitcoins I sell. Once I sold down to 13% exposure, even if it goes up again (due to the continued rise) to more then 13% exposure, I should stop selling, so that I never sell too many bitcoins never to be recovered again.

You are right that locking in profits just means converting one asset into the other. However, if this other asset is more safe then indeed you are converting from a more risky asset into a more safe asset. If this asset is the safest available, it is fair to say you are locking in profits. So I think this expression is not misleading.

However I fully agree with you that 'playing with the house money' is not true. Thanks for explaining in detail why. It leads also to poor speculation decisions as you erroneously think you have not much to lose. Many people make that error when investing in bitcoins and often I am tempted to say that too, 'it's only profit I'm losing' but always correct myself saying: 'no, it's my capital I am losing'.

Your post is fine. Asset allocation is a great strategy. My own long term strategy is similar, but I tend to invest for cashflow and instead of selling, I prefer to buy what looks cheap. This allows me to re-use past analyses of my investments and build a long-term picture of how my assets are doing. it also helps me evaluate new investment opportunities. If it doesn't look at least as attractive as what I am in now, I don't need to bother.

Welcome! Feel free to go in depth


I like your strategy very much. You combine security with growth in a very simple and straightforward way.

I like your attention to the security part especially. Since you take out fiat for equipment + fiat for profit. I think most miners forget the second part and only build up equipment + coins, which indeed means that they'll have nothing if bitcoin fails.

Do I understand correctly that if you could do it over you would not do mining altogether?

I agree that mining can in the long run never be as profitable as simply buying coins. The same is true for any btc stock. Even satoshi dice. Today it's not the moment to dump mining and stock but once bitcoin prices are close to the 200 day moving average again I think it's financially more profitable to allocate all speculative capital to bitcoins. Except if you have a good company idea, that is more original and profitable than mining.

If I copy your straightward strategy to bitcoins, it means buying the bitcoins and from time to time lock in some fiat profit. For example, every time it doubles, sell 5% of the btc.

Sounds like a decent way to approach investing in bitcoins.

I would suggest this as a good approach, but I would suggest one taking this approach should not check the prices too often. A good thing to do is have a few orders to buy and sell up on the exchanges at +/- 10, 20, 50% from current price just so you don't miss any sudden swings up or down.

You are right. Timing is important. And my talent to predict the future is low.

However, I do believe that I am a good speculator. This involves not really predicting the future, but evaluating risk and reward and placing bets accordingly. The Kelly method learned me that it makes mathematical sense to bet more capital on something with a higher risk/reward ratio. Timing is indeed an important part of that risk/reward evaluation.



Agreed. I think the Permanent Portfolio is a better solution as an SP500 index fund as it protect your capital in different economic climates.


Interesting. You have a very diversified portfolio and I'm sure whatever happens you will keep most of your capital.

Are you balancing bitcoin, buying more when it goes below 10%, selling when it goes above?

Ahh, "locking in the profit". It is such a misleading expression. What does that actually mean?

"Locking in the profit" is really a reallocation of assets. Suppose you decide that you want your bitcoins to be 50% of your assets, and then it doubles in price, so now it is 75%. Since you want to keep it at 50%, you must sell some bitcoins and buy some other assets (perhaps even cash). That's what "locking in the profit" means. It is important to remember that you are not locking in anything, you are really moving your wealth from one asset to another.

Another similar expression is "playing with the house's money". The idea is that if an investment goes up, you sell enough of the asset to recover the original purchase price. Then, if the remainder of the asset later goes to 0, you can tell yourself that you didn't lose any money. Of course, that is not rational, and it is something that in inexperienced investor would do. The purchase price of asset has no bearing on the current value of an asset, and you are never playing with the house's money -- you are always playing with your money.

The latter. I felt discomfort reading your questions. I do not value rhetorical questions lacking curiosity and judging me negatively. They don't help me make better decisions. I value criticisms, brought in a friendly manner containing arguments.


Thank you so much. That's a very valid critique you gave and enough of a reason to get rid of my strategy. Indeed, I am not willing to risk ruin via bitcoin and this 'fixed allocation' strategy will lead to that.

I already noticed that I gave up on balancing more and more as we went higher, and when it counted most I did it the least (around $250) because indeed my greed/brave part took over more and more.

I think you might be right that the same will happen when we hit bottom and depressed levels, especially since my strategy can lead to ruin. Very good point. I highly appreciate you took the time to point that out to me. 



I've thought about starting a bitcoin business. But is it not true that this would fail too if bitcoin fails? Why do you find it important that I find a new source of income?

I'm thinking of changing to a simple buy and hold strategy for bitcoin, and locking in some profits when certain milestones are reached but very slowly, hanging onto most of my coins, so that if bitcoin succeeds I become millionaire, and if not I only lose the capital I initially put in and nothing more. This would mean that I indeed let my bitcoins grow to ever larger percentage of my capital. 

I'm sorry to hear you bought at $166, that sucks. What trading rules do you follow normally?

Very good summary. Indeed, buy and hold, doing nothing, although sold as the safest strategy, is indeed the most dangerous as it involves no locking in of profits.

Thanks for sharing. Interesting to hear you also experience prices relatively high today. Good idea to try to earn more bitcoin through trading. I wish you good luck technique.

You can't dismiss timing. Timing is important, especially for something as volatile as Bitcoin. The fact that you got 1 prediction half right isn't very convincing. I would be skeptical of your ability to predict the future, even when you are right.

In my many years of investing I have come to the conclusion that most investors would be better of just investing in an S&P 500 index fund. That certainly applied to me for the first 10 years. I thought I was good, but I was really just naive.

I could stop working now, but I make a lot of money and I just bought a house. I think I will work for another 5 years or so to help pay off the house. Here are my current investment allocations:

30% stocks split equally between US, foreign, and emerging
10% bonds
20% real estate
10% natural resources
10% gold
10% bitcoin
10% cash
Note: the 20% real estate used to be 10% hedge fund and 10% managed futures. The hedge fund did poorly and the managed futures fund was a stupid idea.

I would prefer to treat Bitcoin mining as a strict Bitcoin play especially where the bulk of the cost is the capital cost as is the case with an ASIC. Consider the capital cost of the mining equipment as part the BTC component of the portfolio and apply a depreciation rate to the equipment based on the change in difficulty. So if the difficulty doubles since one acquired the equipment then is value of the equipment in BTC terms is half.

This keeps the question of the exchange rate between BTC and a fiat currency out of the equation of whether a particular investment in mining equipment makes sense or not.

First off, thank you for the interesting thought experiment. Also, it warms my heart to know that my usual, overly long-winded posts might be somewhat at home in this thread

anyhow, the strategy is interesting, but it's starting to make my head hurt. As a kind of thank-you for my newly acquired headache, I would like to posit an alternative strategy. (not feasible for some) -- My own investment began with the purchase of some mining equipment (I have very little capital to invest, so the amount of equipment I have is quite easy to manage... I expect this would be much more difficult for someone trying to invest large amounts)

I simply buy hardware. If I've made the purchase with fiat, I will sell the coins it mines until I've recovered the fiat. Once this threshold is reached, I sell half and hold half. This allows me to take some profits, and also to grow my bitcoin position. I feel that growing the position in bitcoin is important because of the potential for a great amount of profit down the road that I don't want to miss out on. Also taking profit along the way protects me in case of a catastrophic failure in bitcoin. (which is a very real possibility)

Purchasing the hardware in bitcoin however makes the whole thing quite messy, as I would have to mine until I had recovered the spent bitcoin before doing the 50-50 sell-hold strategy. With the increase in hashrate, the prices being asked (recent auction reaching 75 btc for 10 GH/s), it becomes less likely that hardware purchased in bitcoin will ever return an equivalent amount of coins. - If I could do it over, I would have bought the equivalent amount of bitcoin immediately, effectively pegging the price to the dollar.

The danger here is rebalancing the portfolio too soon during a long bull or bear market that does not have a lot of fluctuations. The recent December 2012 - April 2013 bull run is among the worst for this kind of strategy, but for many other periods of the Bitcoin market this kind of strategy has a lot of merit. An erratic market that is going nowhere is ideal for this strategy.

Let's get this straight? You have no significant marketable skills? You intend to live off your "high skills" in investing? And you intend to start a family soon? And you've managed to earn a 45% gain on a 1000% run up? Or is that 45% of your total capital based on only investing 7%?

In response to your original strategy I see two fatal flaws. One is that in an adverse market it eventually leads to ruin. The other is that in an erratic and unpredictable market it will pit you against your own psychological responses endlessly. Eventually you will give in and trade or avoid trading because you cannot help yourself. Especially knowing that your system has the other flaw and that it is unknowable if you are getting close to ruin because of it.

I highly suggest finding a new source of income. The bitcoin economy is brand new and there are all kinds of openings for the entrepreneurial to establish themselves. I just wish I had the time to act on a couple of my own business ideas. One thing you do have right is that if you intend to trade and win you need to have a system with rules and stick to them. I went against my rules yesterday and bought at $166.40. Still feel better having my coins back even though we very likely will drop under $100 here. I too have wondered about the wisdom of allowing bitcoin to comprise a larger and larger portion of one's assets. I'm planning to hold at least until 2021 though. I think it will get interesting by that point.

This kind of strategy can work very well. To keep it simple consider the following portfolio 50% BTC 50% USD. A different ratio can be used depending on the comfort level.  Keep most of the USD in say 30 day US Government T-Bills. Most of the BTC in a secure offline wallet. Keep a portion of the USD and BTC in an exchange say MtGox. The strategy is to profit from the fluctuations in the price so this works best during a market that is trading sideways with a lot of volatility. It is not the best during a long bull or bear run such as December 2012 - April 2013 or June 2011 - November 2011.

Now the key here is how long does one let the portfolio stay unbalanced during a bull or bear run? Waiting actually increases the risk but also the potential return. What I like about this strategy from a psychological point of view is that doing nothing, and not rebalancing, is actually the aggressive strategy.

I agree with you and I might be losing touch with what's normal. I know my performance is very good compared to the average investor. But compared to many bitcoin investors here it's poor.

Comparing yourself with others is a bad idea. Setting your own goals is the way to go I believe. The tenfolding has happened and my goal to double my capital on that has not been accomplished. The explanation why is straigthforward. If I allocated 10% instead of 7% initially, and if I followed the buy and hold strategy, letting it grow, never sell, than today I would have doubled my capital, and today I would have 50% exposure to bitcoin.

Or if I follow my fixed allocation strategy and I had allocated originally 30%-40% to bitcoin and by now would have reduced it to 15% also, I would also have doubled my capital.

So lessons learned.

Today, I am setting a much higher goal. I want to not just double but fivefold my capital on the next rise from $100 to $1000, which I expect again to happen in 2-4 years. I will have to change strategies if I want to accomplish that. Risking 50% of my capital will be required. And a fixed allocation strategy won't cut it as I will have sold most of my coins when we reach $1000. I will have to buy and hold. And indeed, when we reach $1000 I will have 80% of my capital in bitcoin.

This strategy means I initially risk losing 50% of my capital and as it grows I will end up risking 80% of my capital if bitcoin were to fail one day.




I don't understand what you mean? I think I proved to myself that I was very good in 'predicting the future'. Timing was wrong, but end result was right. If my timing is wrong again, and say the next tenfolding only happens in 10 years, instead of 2-4, I still will reach my goal to fivefold my capital on the next tenbagger. I value your feedback.




Thanks for sharing, that was really interesting. Many bitcoin investors that I met and decided to go all in say that they can afford to lose that money as they have good jobs. I was resistant to that argument but you seem to confirm that too. For me I didn't bother building up any resume or career path, so little job security here, though I'm sure I could always find a crappy sales job, though would not make me happy. I am very dependent on my capital for security. I think I have high skills in investing, but if I end up losing 50% of my capital to bitcoin, my confidence in that will be shaken.

At the moment no one depends on me but I want to start a family within 2-4 years. So let's say bitcoin becomes depressed again like in 2011 and I have averaged down into it, I will be at a loss, and supporting a family will become hard, though still possible, if I am being frugal.

I hear you on the gamblers ruin. I think I take care of that by planning to risk maximum 50% of my capital in anything. Does that suffice?

I value your critical feedback. You posts help me in becoming more aware what I want, and what I do not want.

If you feel comfortable sharing I am also interested what goals and/or risk exposure you chose?