I have been a gold bug for most of my life, and normally put a substantial portion of my savings in gold. However, since 2013, gold hasn't really been functioning properly as the hedge against inflation that I look for it to be. I suspect the reason for gold's non performance for the past five years has something to do with central banks constructing derivative markets around gold combined with a large quantity of "paper gold" financial products that are fractional reserve. Regardless of what the actual reason might be, I have an interest in accumulating gold by trading.
Recently I found a simple way to do that which is working pretty well so far. Vaultoro is an online exchange market between Bitcoin and gold. The liquidity of that market is pretty good, with volume ranging from $1M to $20M per day, which is more than sufficient to support my small time trading.
My algorithm is as follows. When I opened the account (with Bitcoin) I split the value 50/50 between Bitcoin and gold. Every day, I log in and check the relative change in the portfolio. Say, for example, that my Bitcoin balance is worth $1250 and the gold balance is worth $1100. That means Bitcoin went up against gold since yesterday.
Next I subtract the lower value from the higher value and then divide the result by 2. ($1250 - $1100) /2 = $75. Now I sell $75 worth of the higher value account, Bitcoin in this example, at the market price.
The result is to re-balance the portfolio to 50/50 by value.
Following this algorithm, as Bitcoin goes up, I accumulate gold. As Bitcoin goes down, I accumulate Bitcoin. The high volatility against Bitcoin makes it the perfect trading partner against gold. Over time, my portfolio gradually accumulates more Bitcoin and more gold, which I can eventually take delivery of.
This method works over long periods of time (months) to accumulate more Bitcoin and gold. In the short run, I might miss the full potential to benefit from being long on Bitcoin as its price doubles. But when the inevitable 50% retraction occurs, this method buys the dips.
I started using this method about six weeks ago, and my portfolio is up 66% in dollar value. During that time Bitcoin price is up about 90%, so I did not maximize my Bitcoin gain. But I accumulated more gold.
This method can be used between any two instruments on other exchanges like Poloniex. Using this method you could trade between Bitcoin and Ethereum, for example.
What I like about this method is that it doesn't keep me up at night worrying if my long position on Bitcoin or Dash will get wiped out by a dip. It is relatively low risk. Even if I only re-balance once a week or once a month, the method still works. But it is most effective if done at higher frequencies.
Advanced Version
Trading exchanges have historically been the riskiest part of the Bitcoin ecosystem. Lots of exchanges have failed for various reasons. Therefore, it is important to protect oneself from the risk of the exchange itself failing. If you wanted to use my method you could limit your risk like this:
- Use 50% of your savings to buy bitcoin and 50% to buy gold.
- Put 80% of your Bitcoin into a secure offline storage device or cold wallet.
- Take delivery of 80% of your gold, from whatever source you get it from.
- With the remaining 20% of the Bitcoin and 20% of the gold, use Vaultoro to trade to balance the portfolios.
Using that method, you keep 80% of your savings under your control. You are only risking the 20% used to trade. When you calculated the account values of your portfolio, count the gold and bitcoin under your control as part of the total portfolio.
May 27 Update
At the peak Bitcoin price of $2700, my portfolio was up 110% using this method. When Bitcoin corrected down to $1900, this algorithm had me selling gold for BTC. With the Bitcoin price around $2000 my total portfolio value in dollars is back around 190% of where it was when I began (90% gain). I now have more gold grams and more Bitcoin than when I began.
The spread between buy and sell orders widened massively as a result of the high volatility of Bitcoin. Everybody seems to want to buy the Bitcoin dip, creating a bit of slippage while shifting gold to Bitcoin.
Declaration of Interests
I actively trade on Vaultoro using the method described here. If many people copy my strategy on that exchange, it will tend to suppress volatility, which goes against my trading interests. However, I also used my affiliate link to Vaultoro above. If many people follow the link and open accounts, I may benefit from any trading fees generated. I do not think either interest is financially significant enough to bias my perspective.