A good general rule here is to think in terms of what percentage of your portfolio (or net worth) you want in a specific asset class, rather than making buying/selling a binary decision. Then rebalance every 3 months.
For example, you might decide you want 2.5%-5% in crypto. If the price quadrupled, you would well about 75% of your stake at the end of the quarter. If it halved, you would buy more.
The major benefit is that this moves you from making many small decisions to one big decision, which is usually easier to get right.
I agree that this is the appropriate strategy to use when adding an investment to your portfolio, but note that if applied to Bitcoin it did not yield the sort enormous gains that motivated this post. So if you think the Bitcoin example should lead us to update away from outside-view-motivated beliefs about our ability to spot market inefficiencies/investment opportunities, you should probably also endorse updating away from outside-view-motivated portfolio strategies like picking an allocation and rebalancing.
I just ran some numbers on this. Suppose you had $100k in savings, read the 2011 LessWrong post and were convinced to adopt a 95% cash 5% bitcoin allocation at the end of Q1 2011, and thereafter rebalanced on the last Monday of every quarter. (Assume for simplicity that your non-Bitcoin holdings earn zero interest, that you don’t add or remove any money from your total savings during the period, and that you successfully avoided having your BTC stolen in MtGox etc.) If you ignore taxes, then at the end of 2017 you’d be left with $414k, which is decent but not life-changing. Further, since you’re rebalancing every quarter you’re paying a lot of taxes if you’re in the US; assuming a federal+state short term capital gains rate of 30% you’d end up with $284k. (By only rebalancing yearly you can decrease your tax liability but you miss out on some of the big rallies; assuming a 15% long-term capital gains rate you end up with $258k.)
By contrast just buying the same $5k of BTC in Q1 2011 and hodling until the end of 2017 would leave you with around $75M (perhaps $60M after tax), which is more like the sort of “winning” Scott seems to be thinking about here. But how would you know to do that rather than, say, selling in mid-2011 for $100k?
A plausible strategy would be to buy say 100 bitcoins for $1 each, then sell 10 at $10, 10 at $100, and so on. With this strategy you would have made $111,000 and hold 60 bitcoins.
I think this seems correct and is also what I have settled on. In theory you can use the Kelly Criterion to work out bounds on the percentages to use. In practice that seems hard.
A good general rule here is to think in terms of what percentage of your portfolio (or net worth) you want in a specific asset class, rather than making buying/selling a binary decision. Then rebalance every 3 months.
For example, you might decide you want 2.5%-5% in crypto. If the price quadrupled, you would well about 75% of your stake at the end of the quarter. If it halved, you would buy more.
The major benefit is that this moves you from making many small decisions to one big decision, which is usually easier to get right.
I agree that this is the appropriate strategy to use when adding an investment to your portfolio, but note that if applied to Bitcoin it did not yield the sort enormous gains that motivated this post. So if you think the Bitcoin example should lead us to update away from outside-view-motivated beliefs about our ability to spot market inefficiencies/investment opportunities, you should probably also endorse updating away from outside-view-motivated portfolio strategies like picking an allocation and rebalancing.
I just ran some numbers on this. Suppose you had $100k in savings, read the 2011 LessWrong post and were convinced to adopt a 95% cash 5% bitcoin allocation at the end of Q1 2011, and thereafter rebalanced on the last Monday of every quarter. (Assume for simplicity that your non-Bitcoin holdings earn zero interest, that you don’t add or remove any money from your total savings during the period, and that you successfully avoided having your BTC stolen in MtGox etc.) If you ignore taxes, then at the end of 2017 you’d be left with $414k, which is decent but not life-changing. Further, since you’re rebalancing every quarter you’re paying a lot of taxes if you’re in the US; assuming a federal+state short term capital gains rate of 30% you’d end up with $284k. (By only rebalancing yearly you can decrease your tax liability but you miss out on some of the big rallies; assuming a 15% long-term capital gains rate you end up with $258k.)
By contrast just buying the same $5k of BTC in Q1 2011 and hodling until the end of 2017 would leave you with around $75M (perhaps $60M after tax), which is more like the sort of “winning” Scott seems to be thinking about here. But how would you know to do that rather than, say, selling in mid-2011 for $100k?
A plausible strategy would be to buy say 100 bitcoins for $1 each, then sell 10 at $10, 10 at $100, and so on. With this strategy you would have made $111,000 and hold 60 bitcoins.
I think this seems correct and is also what I have settled on. In theory you can use the Kelly Criterion to work out bounds on the percentages to use. In practice that seems hard.