We are still way out in front.
We are aware of Bitcoin and the reasons that some people (myself included) have for placing some value on it. There's a lot of volatility, and that can be scary for someone using bitcoin to protect their savings from fiat currency's long term inflationary tendencies. To mitigate this fear of volatility, I want to explain two methods that are certain to help. I have a third one, but you can read all the prior newsletters to learn about that.
First up, lending your bitcoin to other people who think the price is going down (or who want to make it go down) can put your bitcoin to work for you with a little risk and hardly any time. I'm using BitFinex to do this. BitFinex is a company registered in the British Virgin Islands and provides a "Deposit" account where you can keep your bitcoin. Only keep as much there as you'd be willing to lose to discover that BitFinex is too poorly run or dishonest to trust. (That's my advice for letting someone else manage anything you own.)
In the "Total Return Swaps" section, you can click the "Offer Swap" tab to set a rate and a term. The rate is per-day, and right now works out to 8.1% annually. You earn bitcoin when you lend bitcoin, and dollars when you lend dollars (if you decide to sell your bitcoin and lend out the proceeds).
The second method is something I call the "Bitcoin Stabilization Fund." The idea is to view the market as plagued by speculators and manipulators. Our job, in this context, is to slow down their efforts to push the price around. If it drops, buy some to help push it back up. If it jumps, sell some to push it back down. Of course, if it jumps, and you sell some, and then it jumps again, you'll be sad that you sold early, and the same goes the other way. For this reason, it's best not to trade too much. In fact, if you want to practice this with very little risk beyond just holding bitcoin, do this:
Notice that following this strategy causes you to have an amount of btc that is equal in value to the amount of cash you have. If you never trade, you've simply cut your (good or bad) performance in half. If you trade on the rare large move, AND the price returns to where it started, you will make some profit. If the price only goes one direction from here on out, this is a losing strategy, though at some point you will have an awful lot of either bitcoin or cash (sadly, whichever is worth less).
- Buy or sell so that you have USD and BTC that are equal in value.
- When there is a price move large enough to motivate you, buy or sell only half of the change in value of your portfolio. So if the price goes up and your holdings are worth $50 more, sell $25 worth. And if it goes down and you lose $50, only buy $25 worth.
No one ever explained it to me, but I think this is the foundation of portfolio allocations. To maintain any given set of allocations while prices change, you have to buy low and sell high - the prices control your trading, and, unless you pick at least one ultimate loser, it generates profit from volatility.