Long like a Venture Capitalist

Let’s say you had the foresight to buy Bitcoin in December 2015. You decided to hold it for a year and sold it a year later, in December 2016. If you bought at $452 and sold at $900, you had a 99% return. Let me summarize that with the little blue square. It says: You sold in December 2016, realizing a 99% return.

But of course, hindsight is 20/20. Perhaps instead you bought in May 2018, and sold a year later in May 2019. Let me represent that with a smaller red square.

The wild price swings in those graphs hide a long term trend. Let’s use the idea of the little squares we used above. I will buy $100 of Bitcoin on a random day of the month, every month, and sell a year later. What would be the results of adopting this strategy?

Each square tells us the profit or loss that we make buying and selling after a year, on that date. If the profit was 200%, the square will say 2x. So buying Jan 2017 and selling Jan 2018 got you 11x or a 1100% return.

Ok, so how much money did we make? You invested your first $100 in January 2014, the next $100 in February 2014, and so on until the last $100 bought in September 2020. You would have bought $100 every month for 81 months, so $8,100. This strategy would have made you $15,700. Not bad. But what about holding 2 or 3 years?

On a 2 year horizon we see much less red. Here our investment was multiplied by 6. Holding for 3 years our return is almost 10x.

The volatility of the last 6 years is closer to the experiences of a venture capitalist: There are multiple failures, liquidity is poor, growth happens in wild spurts. Investing in crypto has been less like holding an S&P500 company, and more like investing in a nascent industry.
Trying to time the market is hard, so successful investments typically follow long term trends and fundamentals.

The point of these graphs is not to recommend a good trading strategy. This one is not great. The point is that investing on random days without much attention to price, has positive long term returns.

Crypto in a portfolio

Drawdowns like the ones in this image may be unacceptable for you. This of course depends on your risk tolerance, investment goals and time horizons.

A more reasonable strategy is to use crypto to diversify your portfolio [1], [2].

Industry leaders are recommending investing between 1% - 5% of your assets in crypto (1% for the crypto-curious, 5% for the more daring). Bitwise Asset Management recently simulated allocating 2% - 10% of a traditional stock and bonds portfolio to Bitcoin [3]. A simple rebalancing strategy between 2014 and 2021 had the following returns

In the past, when Bitcoin fell, stocks and bonds rose. Capturing Bitcoin profits regularly and rebalancing allowed returns even during the worst of Bitcoin drawdowns. A more thorough analysis can be found in their report. We explored a trading strategy to better understand the long term trends in the crypto markets.

Prudent investors in crypto must respect two principles:

• Short term fluctuations are hard to time so we must focus on long term trends.
• Exposure must be managed by investing a reasonably small part of our portfolio.

This leads us to the question of risk, which we will explore in our next article.

Essential References

[1] 2021, Jurrien Timmer, Understanding Bitcoin - PDF, Fidelity Investments.
[2] 2021, Ryan Haar, How much of your portfolio should be in crypto, NextAdvisor / Time.com
[3] 2021, David Lawant, Matt Hougan, The Case for Crypto in an Institutional Portfolio, Bitwise Asset Management