On Saturday 9 of July 2016, the Bitcoin halving finally occured, and its effects start to be visible, not causing a rush increase in the bitcoin price, but instead a very dynamic oscillation of its value that has been taking place in the last days. In my opinion, these oscillations will last some more weeks as aftermaths of the halving event.
When I started to invest in cryptocurrencies it was a very stressfull experience, since I was a rookie and I didn't know what to do, so I ended up losing some money. I barely slept those days and started to give importance to a wiser investment strategy. And I found what I thought may be a very well known solution (Or... could it be a secret among experts?), but anyway I will share it with you.
THE GOLD INVESTMENT STORY
Let's suppose we have a man who buys 10 little bars of gold. And let's say that each little bar's price is $100.oo. So this man is the happy owner of $1,000.oo in gold bars. And let's say that the price of gold starts to rise the next days after his purchase.
What is the most common reaction?, What is the "market" reaction?. The man may not only be happy, but also may be interested in buying more bars of gold. But let us say that our friend remains calmed.
6 weeks later, the price of the gold bar is $200.oo. Our friend is very happy to have doubled the value of his investment. Everything seems to indicate (even the news and investment media) that in the next days, the gold price may triple! So our friend remains calmed again.
And suddenly, withount any previous warning (as usual in the investment enviroment) the gold price collapses! In two or three days the price reaches a historical minimum of, say $50.oo. Our friend, logically panics. And when a person panics may make the dumbest desicion of a lifetime.
Our friend, frightened with the idea of losing more money, rushes and sell all of his gold, at ANY price. Then, two weeks later, the gold price stabilizes around $90.oo.
Does this ring a bell to you? Initial wealth of our friend: $1,000.oo and his ending balance: $500.oo or less. What do you think our friend could have done? If he has had a time travel machine, he may have sent a message to himself in the past: "When the gold's price hits $200.oo the bar, sell it all!!!"
But, the truth is that there is no such time travel machine. What he COULD have done was to sell PARTS of his gold investment as soon as he saw that the price rose. But it was wise not to sell it all.
The logics of the stock market is the following: BUY when a commodity price is soaring, and SELL if the commodity price falls.
But the logics of any merchant, is to BUY goods precisely when they are the cheapest, and SELL them when they reach the highest price possible. And I think that the merchant's logics works way better.
WHAT TO DO WITH CRYPTOS?
A less speculative investor, would not panic. If he knows from good sources and from his personal research that the gold price will increase in the long run, he knows that the fluctuations are normal, and there is nothing to be worried about.
We invest in those assets we think are going to gain value in time. And one of the reasons to think the price of an asset will soar is that said asset is scarse (limitted in number or quantities). Well, cryptocurrencies ( most of them) have been designed precisely, with this ending in mind: To have their price increase with time. Instead of the relative value of fiat currencies which are issued without any restriction by central banks, cryptocurrencies have a roof limit in their quantities.
If any crypto has survived to its infancy, it is very likely to see its value growing.
And this is our basic criterion. From this point on we can search among the most profitable cryptocurrencies in the market (i.e., the ones with the biggest capital market, like bitcoin, ethereum, DAO, and now steem!), and polish our gesses.
Cryptocurrencies give the common citizen the power of participating for the first time in history in an investemnt market. The minimum quantities required to initiate an investment, and the cost of any transaction fee are ridicolously low compared to the traditional stock markets.
So, let me introduce to you to my simple recipe to a "loseless" investment procedure.
MY INVESTMENT RECIPE
1° Choose a good crypto-asset to invest on. This is any asset you think is a good investment right now, or for the next weeks. And due to the halving event, Bitcoin is a very good candidate.
2° Choose a good COUNTER-Asset. Choose any other crypto asset you are pretty sure is going to gain value, or at least to keep its value the next days. As long as it differs from the asset in step N°1, and as long as you think it is an asset that will keep a good value or increase its value in time, that's ok.
3° Bear a spreadsheet, like an excel document, to record the market values of your asset and your counter-asset.
4° Choose a window of values for your asset. I mean, what value do you think your asset price would not go below? This will be the "floor" price for the period of time you will handle your investment. On the other hand, what do you think your asset price would not go above? This will be the "roof" price. These values will help you to adjust the relative margins of change for the asset and counter-asset prices. This is in order to give you the control over the risk in your movements. These are subjective and intuitive variables.
5° If the price of your asset increases with respect to your counter-asset, sell a small part of your asset to buy a small part of your counter-asset. How much? This must be a personal decision, but in terms of percentage of the amount of asset you have, this is my formula:
[1-(Old Price-floor)/(New Price-floor)] x 100% <1st formula>
6° If the price of your counter-asset increases with respect to your asset, sell a small part of your counter-asset to buy a small part of your asset. How much? Again, in percentage terms, this is my formula:
[1-(Old Counter Asset Price - {1/roof})/(New Counter Asset Price - {1/roof})] x 100% <2nd formula>
These formulas are based on intuition and common sense criteria, but let's leave the maths for another moment, and let's focus on more relevant topics.
The expected situation is that if the price of your asset rise with respect to your counter-asset, the price of your counter-asset will decrease with respect to your asset. But it depends in many cases on the mediator you choose, and the fees on the exchange transaction.
In some rare cases, it may ocurr that both prices may rise! In that case, what we should do?
We should sell in both directions!.
And in those rare cases in which the both prices fall, DO NOT DO ANYTHING, or you will lose money!
7° Repeat these steps (from 1° to 6°) as often as you can and never sell completely any of your assets.
Since price fluctuations ocurr frecuently, especially in dynamic markets, the more often we move money, our portfolio value is more likely to increase.
If your asset price rise, and then falls and finally recovers the initial price (like in the gold story), following this procedure you will increase the balance in both of your assets (the asset and the conuter-asset).
A BETTER GOLD INVESTEMENT STORY
Let us see now what would have happened if our gold investor friend had applied the proposed recipe or procedure:
#1: The investor must have kept a reserve in dollars as counter-asset, besides his investment in gold. So, let's say that his initial balances were: 10 bars of gold and, (say) $700.oo.
#2: Let's say that our friend chose as floor value $70.oo and as roof price, $150.oo.
#3: When the bar's price went from $100.oo to say, $130.oo it corresponded to an increase of 50% (According to the 1st formula). But as the transactions must be made with small portions of our investments, our friend needed to adjust the window for gold prices. What this means is that you always need to trust a little in your guts. Let us say thar the floor price was changed to $40.oo. So the 1st formula gave an increment of 33%.
From my point of view it seems a little bit large yet. But it's ok. Our friend sold 3 bars of gold.
Now he had 7 bars of gold and $1,090.oo.
#4: Days later, the price of the bar of gold rose up to $160.oo. Amazing! Now my 1st formula gave an increment of 25%. He could sell 25% out his 7 bars: 1.75. So, our man rounded up and sold 2 bars of his gold.
Now he had 5 bars of gold, and $1,410.oo.
#5: The news were spread, the gold hit a higher price. But our friend wasn't pending in gold prices, and by the moment he ran to the dealer, the price was less than $200.oo the bar: Then the price was $180.oo. There was no tragedy. It was still an increase since the last transaction (at $160.oo). So it was good to sell. Now the 1st formula gave him 14%. And 14% of 5 = 0.71.
He could adjust again the window, making the floor again at $70. But the difference is not much. Our friend decided to sell only 1 bar of gold, because there were lots of exprerts anouncing that gold may triple its price.
So, now our friend had 4 bars of gold and $1,590.oo.
#6: But, bad news! Gold prices fell two days after to $140.oo. It may have been just a rough patch, but the procedure was clear: BUY GOLD! How much? There was a very low roof. So he adjusted it to, say $300.oo (Since experts said the price may triple) and the calculations for the 2nd formula gave him:
Old Price of Counter-Asset, the dollar: 0.0056 bars of gold per $. (=1/180)
New Price of Counter-Asset: 0.0071 (= 1/140)
1/roof : 0.0033 (=1/300)
Relative increase (2nd formula): 42 % ... May be a wrong guess. So he may followed his guts by removing the "1/roof" part, and the increase was 22%, much more close to a "small" quantity.
And 22% of $1,590.oo = $353.33 = 2.5 bars of gold. So our investor decided to buy 3 bars.
So, now he had 7 bars of gold and $1,170.oo.
#7: The situation worsened. Gold price was around $110.oo. The procedure told him to buy more gold!
Even when it may be counter-intuitive, things need to be done the way a merchant would: buy cheap assets.
The 2nd formula gave him this time (with "roof" term removed) 21% of $1,170.oo: 2.28 bars. So he bought 2 more bars (he had enough dollars to do it).
So, now he had 9 bars of gold and $950.oo.
#8: The ultimate collapse happened. The gold price hit the ground of $50.oo. What a tragedy! But he felt confident, and decided to BUY. Yes, to BUY.
If he kept the "roof" term removed from our 2nd formula, it would suggested him to buy 54.5% of his %950.oo: 10.35 bars of gold!... He made a little risky movement, and bought 10 bars with $500.oo. (He had enough dollars to do it!)
So, now he had 19 bars of gold and $450.oo and expected the gold not to fall much more.
#9: Weeks after, the situation was normal again with, say $90.oo the price of the bar of gold. So, our investor decideed to sell gold again, according to the 1st formula (let's make it easier without the "floor" term): 44% of 19 bars of gold = 8.4 bars.
So the man sold 8 bars, and the ending balances were: 11 bars of gold and $1,170.oo.
How much did the investor have now?
$90.oo x 11 bars of gold + $1.170 = $2,160.oo
From an initial balance of
$100.oo x 10 bars of gold + $700 = $1,700.00
You may think that 27% of profits in dollars in some few weeks is not much, but is a good figure in the investment enviroment. But if we see the profit in terms of bars of gold:
Initially: 17 bars
At the end: 24 bars
There is more than 41% of profits.
If these cycles of fluctuations in prices are oftenly repeated and seized, these profits will accumulate in time, giving to our portfolios a good reward from this kind of procedure.
TABLE
Step Bars of Gold Balance in $ Price of gold
#1 10 $700 $100
#2 7 $1,090 $130
#3 5 $1,410 $160
#4 4 $1,590 $180
#5 7 $1,170 $140
#6 9 $950 $110
#7 19 $450 $50
#8 11 $1,170 $90