Art of the Smart

Thoughts and lessons from a techie, entrepreneur, and curious observer of the world.

A Reliable Bitcoin Strategy

Categories: [finance], [cryptocurrency]
Tags: [bitcoin], [etherium], [investing]

With all the recent run-up of Bitcoin and Etherium, I have had a lot of friends and family come out of the woodwork asking me about it. A few of them have asked how many I own (less than you think) or how much I've made (more than I deserve). A few have asked if I have any advice, which I'm happy to provide here.

TL, DR: I used dollar-cost averaging, and it's worked so far.

The situation is this; you want to invest in a coin but you don't know whether it'll go up or not. There's no short-selling to speak of nor are there derivatives that you can trade. So how do you deal with the uncertainty?

There's a venerated (though sometimes maligned) technique called Dollar Cost Averaging. In this case, we are also talking about continuous automatic investment (CAI) although they're technically different things. Read the Wikipedia article about it for details, but the short version is this:

By dividing the total sum to be invested in the market (e.g. $100,000) into equal amounts put into the market at regular intervals (e.g. $1000 over 100 weeks), (Dollar-cost Averaging) hopes to reduce the risk of incurring a substantial loss resulting from investing the entire "lump sum" just before a fall in the market.

It's as simple as that. You take the block of cash you want to invest and you spread it out over time. You're effectively trading away the chance of having the tippy-top profits in exchange for some certainty that if there was a crash, you wouldn't feel the full brunt of the problem.

Normally at this point I'd show you a graph, but in this case I'm not going to. In finance, it's surprisingly easy to cook up a chart that shows a strategy doing well. I can pick favorable start and end dates, a flattering y-scale, and over-engineer the methodology until it shows what I want it to show. Instead, I'll refer you back to the copious literature about DCA and remind you gently that I studied this stuff in college. I wouldn't do this if it wasn't a viable strategy for the fire-and-forget investor.

If you watch the news too closely you might feel tempted to buy the dips or sell the peaks. There are enough smart people watching Bitcoin now that it's unlikely you'll time the market perfectly. Instead, aim to keep tabs on things on the broadest scale; where is bitcoin being accepted? Are people still talking about it? Are there alternatives coming up and, if so, what do they do better?

After that, you can sit back and see how things play out. If you want to buy something online just double-check if they accept Bitcoin and, if they do, use your coins to pay for it. As of this writing (2017-07-14), these were the top online businesses that accept Bitcoin:

When you use Bitcoin as a currency, your portfolio strengthens because you’re helping to reinforce the idea that it is a currency and not just some toy.