Feasibility test of Bitcoin fixed investment

summary

This article verifies the feasibility of the Bitcoin fixed investment plan through experiments and calculations. The results show that if fixed investment is used in March 2015, an annualized profit of more than 80% can be achieved. If fixed investment is used at the high of 5,000 yuan in January 2014, a profit of 37% in two years can also be achieved. Therefore, whether in a bear market or a bull market, fixed investment in Bitcoin is a very stable investment and can achieve high profits.

Introduction

Bitcoin is a peer-to-peer network payment system and virtual pricing tool, known as digital currency by some people. It was first launched in 2009 by a developer with the pseudonym Satoshi Nakamoto in the form of open source software ^[1] . Because it uses cryptographic technology to control the production and transfer of currency, Bitcoin is also considered a type of encrypted electronic currency (Cryptocurrency).

The unit of Bitcoin is BTC, and its total amount is fixed at 21 million BTC. The decentralized nature of Bitcoin determines that it is impossible for it to have an ultimate value anchor, so its price has been in drastic fluctuations since its birth. From being worthless at the beginning, the price of Bitcoin reached a historical high of $1,242 on November 27, 2013 (Figure 1).

Figure 1 Bitcoin price trend chart in the past three years (data from coindesk.com)

Although the sharp fluctuations in the price of Bitcoin have created huge investment arbitrage opportunities for a small number of investors, they have also caused trouble and panic for many investors. For example, at the end of 2013 and the beginning of 2014, a large number of investors were trapped at high prices and suffered heavy losses. For this reason, many people are deterred from investing in Bitcoin.

In order to avoid the risks brought by price fluctuations, some players have proposed to invest in Bitcoin by fixed investment, but few people have conducted feasibility studies on it. In order to verify the feasibility of fixed investment in Bitcoin, we started to conduct experiments related to fixed investment in Bitcoin in March 2015, purchasing 1,000 yuan of Bitcoin every week. Although the experiment has not been completed so far, the interim results show that fixed investment is indeed a stable way to invest in Bitcoin.

method

The detailed experimental method was published on the Babbitt Forum ^[2] and is briefly introduced as follows:

• Starting from March 11, 2015, 1,000 yuan worth of Bitcoin will be exchanged every week.

• Only deposit and no withdrawal, refrigerated at address: 1EkfiNffNHypzZij6vtVAsbDzcHEbNAaJU

• When the price of Bitcoin breaks through 10,000 yuan, stop buying.
  
  Note: Since the price of Bitcoin has not exceeded 10,000 yuan, this experiment is still ongoing.

result

The experimental results are listed in Table 1. Since March 11, 2015, a total of 41 bitcoin exchanges have been made, with a total cost of 41,000 yuan, 24.55259858 BTC purchased, and a cumulative average price of 1,669.88 yuan (Table 1). Taking 3,050 as today's price, the calculated profit is as high as 82.65%.

Table 1 Weekly fixed investment experiment results (from March 11, 2015)

Comparing the price of each bitcoin exchange and the cumulative average price, we found that although the price of bitcoin fluctuates greatly, the cumulative average price changes relatively little, which shows that fixed investment can effectively resist the impact of bitcoin price fluctuations. At the same time, the cumulative average price is closer to the low point of the bitcoin price, which effectively dilutes the cost of holding coins (Figure 2).

Figure 2 Comparison of the average single purchase price and the cumulative average price of the weekly fixed investment experiment (since March 11, 2015)

calculate

Looking back at the price of Bitcoin from March 11, 2015 to the present, the market is clearly in an upward phase (bull market), so the profit of the above experiment may come from the rise in the price of the currency, which is not representative. Therefore, we assume that the fixed investment experiment started on January 1, 2014. According to the price trend of Bitcoin in the past two years, we can obtain the final investment results through calculation. As shown in Table 2, the fixed investment started on January 1, 2014, and the price on that day was more than 4,800 yuan. So far, a total of 103 bitcoins need to be exchanged, costing 103,000 yuan, and 46.56949224 BTC will be purchased, with an average cumulative price of 2,211.75 yuan. Taking 3,050 as today's price, a profit of 37.90% can still be achieved (Table 2).

Table 2 Calculated weekly fixed investment experiment results (since January 1, 2014)

Similarly, by comparing the price of each Bitcoin exchange and the cumulative average price, we found that although the overall price of the currency was falling and accompanied by huge fluctuations, the cumulative average price was slowly approaching the lowest point. In the end, as long as the price of the currency rebounded slightly, a profit would be achieved (Figure 3).

Figure 3 Comparison of the calculated weekly average purchase price and cumulative average price (since January 1, 2014)

The above calculation results show that even if you start investing when the Bitcoin price is high, you can still achieve very considerable profits today.

in conclusion

Both experiments and calculations have shown that regular investment is a stable way to invest in Bitcoin, which can bring huge profits in a bull market and dilute costs in a bear market.

Acknowledgements

I would like to thank the Babbitt Forum for its help and support. If this article wins a prize, all the rewards will be donated to Babbitt. I would like to thank all the brothers who support me in the forum. I would also like to thank Huobi.com for hosting this essay contest.

Additional Notes

Note: Some people have questioned the fixed investment plan, so this additional explanation is provided.

We first conduct simulation calculations for the following four situations:

• The price of the currency increased linearly from 1 yuan to 10 yuan.

• The price of the currency fell linearly from 10 yuan to 1 yuan.

• As the index rose, the price of the currency increased from 1 yuan to 10.60 yuan at a rate of 1.3 times each time.

• As the index fell, the price of the currency dropped from 10.60 yuan to 1 yuan at a rate of 1.3 times each time.

The results are shown in Tables 1 to 4.

Are you a little surprised? When the price of the currency rises linearly, the fixed investment cost is only 3.41 yuan, which is much lower than the average price of 5.50 yuan. This shows that the average cost of the fixed investment is closer to the low point of the currency price. (This is a bit contrary to our feeling, but it is nothing strange. There is a mathematical proof that the fixed investment cost is actually the harmonic mean of the currency price. The average value of the currency price is called the arithmetic mean. The harmonic mean is always less than or equal to the arithmetic mean. Please Baidu it yourself).

When the price drops linearly, the currency price drops 10 times, and the fixed investment cost is still 3.41 yuan. This shows that fixed investment does not care about the entry time. The cost is almost the same no matter when you enter the market.

Similarly, for exponential market conditions, if the price of the currency rises 10 times or falls 10 times, the fixed investment cost is only 2.49 yuan, which shows that fixed investment is particularly suitable for exponential market conditions with sharp rises and falls. For a more intuitive understanding, we can look at the picture.

Next, we analyze an example where the price of a currency first drops from 10 yuan to 1 yuan, and then rises from 1 yuan to 10 yuan. This is the simplest fluctuation. The results are shown in Table 5.

For a more intuitive look, we also make a graph.

The above figure shows that only when buying coins in the gray triangle area can the holding cost be lower than the fixed investment cost. In all other time periods, the cost of buying coins with a single bet is higher than the fixed investment cost. People who have traded coins should know that in a market with sharp rises and falls, most people simply cannot buy at the lowest point. So this gray area is often hard to come by. This is why I dared to bet with AMS that I would make a fixed investment in 2016 and he would find a time to go all in, and compare the yields by the end of the year. It's not that I believe I will win 100%, but through mathematical calculations, fixed investment has at least a 65% chance of winning.

Let's summarize the advantages and disadvantages of fixed investment. Advantages:

• The fixed investment cost is not the average coin price, and the fixed investment cost is always lower than the average coin price during that period. Therefore, the return in a bull market is higher than the average, but the loss in a bear market is lower than the average.

• Whether it is a bull market or a bear market, the cost of fixed investment is similar, so fixed investment does not care about the entry time, and you can enter the market at any time. Specifically for Bitcoin, due to the huge fluctuations in the price of the currency, many people are entangled in when to enter the market. If they buy it, they are afraid that it will fall in a few days, and if they don’t buy it, they are worried about a sharp rise. If you use fixed investment, there is no such concern at all, because a few days earlier or later, the price of the currency is a few hundred higher or a few hundred lower, and the impact on the final result is minimal.

There are advantages and disadvantages. While enjoying the advantages of fixed investment, we must give up some things:

• The returns are significantly lower than if you were fully invested at the lowest point.

• The battle is long and requires patience and perseverance.

Finally, all our analysis is for the future, so the ultimate goal of all analysis is to guide future actions. Some people talk about past analysis in detail, saying how all-in is so and so, and Wanbihou was achieved by all-in. However, if you ask him, if I have money today and want to invest in Bitcoin, should I all-in today? Or when is the right day to all-in? He will start to talk about other things. This is called no operability, and all analysis is meaningless!

On the contrary, I can tell you very clearly that you can invest in Bitcoin today. Although the profit and loss cannot be guaranteed, the profit in the bull market will definitely be higher than the average, and the loss in the bear market will definitely be lower than the average. This is called operability!

A little digression. It's not that I don't like people raising objections, but I hate people who only talk but don't practice. The above calculations only require elementary school math at best. If you have time to argue with me for a long time, why can't you just use Excel to calculate it yourself? Is it difficult?

Text/No Bit in Hand

BTC address: 1 szwbt YEpUXsM7HZq2nz2RKE736sbXe2M

Notes (↵ returns to text)

1. Satoshi Nakamoto, 2008. Bitcoin: A Peer-to-Peer Electronic Cash System. https://bitcoin.org/en/developer-documentation↵

2. No Bitcoin in Hand, 2015. Captain’s Diary: Bitcoin Voyage Record. http://8btc.com/thread-15047-1-1.html↵