Fast Forward to June
April and May were a repeat of the steps we took in February. Then things got interesting. Bitcoin price rose from $529 in May to $670 by the end of June. As a result, our initial position is worth $6334. This is higher than the target position of $6000. So, for the first time, we get to sell. We sell 0.5 BTC for $334 to bring our final BTC position down to target.
Notice our final cash position increases from $-3968 in May to $-3634 in June as a result. This is the first time we had an increase in our cash position.
Come December, Bitcoin price rises to $963, and our initial BTC position of $14,272 is well above the target of $12,000. Just like the buy limit, we also have a sell limit of $1000 per month. So, we sell 1.04 BTC for $1000. We end 2016 with 13.78 BTC worth $13,272 and a cash position of $-6261.
Buy low and sell high. We bought when our BTC position was lower than target, and sold when it was higher than target through the year. Adding up buys and sells for the year gives us insights into how this strategy works:
- We bought 15.32 BTC at an average price of $496. Bitcoin price was higher than that in 8 of the 12 months so we bought at a very good price.
- We sold 1.54 BTC at an average price of $868. Bitcoin price was lower than that in 11 of the 12 months, so we sold at an excellent price.
We bought low and sold high. And not in a small way. Our selling price was 75% higher than the buying price.
We end the year with a BTC position of $13,272 (13.78 BTC), and a cash position of $-6261. Put differently, we spent $6261 to build a BTC position worth $13,272. Due to significant Bitcoin price appreciation, the final position is above the target value even after selling $1000 worth of BTC in December.
We continue to target growing the portfolio by $1000 every month but the ride gets wilder in 2017. Given the impressive Bitcoin price appreciation, we sold in 11 of the 12 months. Moreover, we hit our sell limit of $1000 every month except for January. We only bought once in the month of March.
Note that our cash position turned positive for the first time in September. That means we put our original investment back into our pockets, and kept adding to the positive cash position for the rest of the year. In other words:
We were playing with ‘house money’ starting September.
Buy low and sell high. We bought 0.93 BTC at an average price of $1079, and sold 3.85 BTC for the average price of $2679. Our sell price was 148% higher than the buy price.
Our Bitcoin position grew to $150,394 by the end of the year. That’s over 6 times the target position of $24,000. In addition, the cash position grew to $3041.
A year most Bitcoin and crypto investors would love to forget. How do you think our strategy performed? Let’s take a look.
Remember our Bitcoin position had appreciated to $150,394 (over 6X the target) in 2017. Even though Bitcoin price kept falling throughout 2018, we are so far ahead of the target that we could keep selling 11 of the 12 months, and improving our cash position. The cash position grew to $14,041 by the end of November.
Our Bitcoin position finally fell below the target in December and we bought Bitcoin for the first time in 2018.
Buy Low and Sell High. I am a broken record at this point. We bought 0.27 BTC at an average price of $3747, and sold 1.57 BTC for the average price of $7023. Our selling price was higher once again — this time 87% higher than the buying price.
Bitcoin found a bottom in December 2018. Let’s end the month-by-month play here and summarize the results. We close December with a BTC position worth $35,822 and a cash position of $13,041 — that’s a total of $48,862. We already took our initial investment off the table so these are all profits.
Remember the three rules of our strategy:
- Target — target growing our BTC portfolio by $1000 per month
- Buy limit — buy up to $1000 of BTC when our position is below target
- Sell limit — sell up to $1000 when our position is above target
Since our focus is on keeping profits, let’s try a few variations of rule #3 — let’s change the sell limit. What if we sold up to $2000 per month? Or $5000? What if didn’t sell at all?
The table below summarizes the results of different sell limits. Note, rules 1 and 2 — monthly target of $1000 and buy limit of $1000 — are unchanged across all these tests.
Sell limit $0. We don’t sell at all in this test. The negative cash position of $-7240 reflects that we never took any profits. Once we exceeded our target in November 2016, we never had to buy or sell any Bitcoin again. Our total position (BTC + Cash) is $48,277.
Sell limit $2000. We sell up to $2000 every month we are above target. This results in a much stronger cash position of $29,817, and a smaller Bitcoin position. Our total position is $51,839. This turns out to be the best performing strategy over the test period. Because we sold more aggressively, our Bitcoin position falls below target in November 2018 and we start buying again.
Sell limit $5000. With a $5000 sell limit, both our Bitcoin and cash positions are smaller compared to sell limits of $2000 and $,3000. Why is that? We were too aggressive and sold too much Bitcoin too early. The cash position rose rapidly to $39,181 in February 2018, but then we were buying Bitcoin for the rest of the year. This test shows there is a limit to how aggressively we can sell before performance starts deteriorating.
The strategy tested here is my attempt to combine the merits of Dollar Cost Averaging and Value Averaging. I won’t describe DCA and VA here — you will find plenty of material on the internet. My focus is to demonstrate the merits of using a disciplined strategy to gradually build a position in high-return high-risk assets like Bitcoin, and potentially take some profits along the way.
An investor in high growth assets makes decisions in immense uncertainty — the future value of the asset is near impossible to estimate — so my goal was to provide a simple framework to manage a bumpy ride without losing much sleep.
Also, by setting a target, and a buy limit — $1000 in our tests, but it can be any amount — the strategy gives you flexibility to abandon with smaller losses if the returns are not positive. For example, if you applied the same strategy to an asset that went spiraling down, you could stop investing further in any month, take your losses, and look for a different asset to invest in.
Selling not your thing? Not everyone may be interested in trading part of their Bitcoin position for a better night’s sleep. For those focused on HODLing, you might want to take a look at another strategy I discussed in How To Buy Bitcoin At Deep Discounts.
Taking profits puts money in your bank account, and helps you sleep better. In the various sell limits we tested above, the idea is not to find the best performing strategy and adopt it. Past performance is not an indicator of future outcomes. The goal is to understand the trade-off between HODLing and taking profits, and bring better balance to future investment decisions.