How to buy Bitcoin on autopilot
Learn how to dollar cost average your purchases of Bitcoin or Ethereum
Last week I listened to a podcast on Tales from the Crypt where Marty Bent had Misir Mahmudov on as a guest to plug his book entitled "This Book will Save You Time".
The premise is that while economics is defined as the study of the "use of scarce resources to satisfy unlimited wants" - fiat, which is a representation of value across time, is anything but scarce.
Ultimately, because every resource is a function of the human time that went into producing it - money itself is a storage of your human capital across time.
Hence the phrase, "Time is money".
When governments print money they are in effect devaluing the time you have stored in paper wealth and redistributing the proceeds to other members of society.
From the book:
In a world where your money thus your time is continuously devalued there's a potential technological solution. In a world where you are forced to work non-stop like a hamster on a wheel, where you have to chase the carrot like a donkey, there's the potential to break free.
To store your hard earned wealth in something that is finite, something that is not being constantly devalued through inflation. Unlike any other currency, Bitcoin is designed to value your time.
In the time where your money loses its value day-by-day, your personal day-to-day is controlled by a handful of tech giants who strip your privacy for ad revenue, Bitcoin is a breathe of fresh air.
In this post then I want to evaluate the premise that Bitcoin is a better store of your time than traditional fiat currency and how you can go about putting this savings vehicle on autopilot.
Let's quickly recap where we've come from in this series.
Recap
We started off exploring how Bitcoin & crypto is a category killer poised to replace fiat, next we discussed valuation models providing good times to buy Bitcoin and then we explored stablecoins before making our first trade on a decentralized exchange.
Jump into the links below to catch up:
What metric can we use?
What can we use to objectively measure whether Bitcoin is a better store of your time.
Most investors would point to yield or the rate of return. Historically, equities have yielded 9.5% across approximately the last 100 years hence why many 401K's and portfolios are built on a basket of them. Likewise, real estate has averaged 3.7% since 1928 but with leverage can be much greater.
However, the absolute number is still not a good measure because it doesn't take into account risk.
A better measure would be the Sharpe Ratio developed by William Sharpe in 1966.
It's defined as:
The Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. It is defined as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment.
So what does this mean?
Well investors need to be compensated for taking on any risk above the risk-free rate - the Sharpe Ratio is effectively what returns they receive per unit of risk they take on.
Because the Sharpe Ratio adjusts for the risk or volatility in each market, it can be used as a good measure to compare performance of asset classes without paying attention to the ups and downs.
What's a good Sharpe Ratio?
Before jumping in, I should mention there are a number of problems with the Sharpe Ratio - one being it assumes a normal distribution of returns but often returns are anything but normally distributed.
Case in point, hedge funds which appeared to be performing well over the last decade - yielding consistent returns with high leverage - would erroneously show a high Sharpe Ratio but then implode during a black swan event like Covid-19.
Still it presents a good starting point for our analysis.
Sooo...
A ratio great than 1.0 would be considered acceptable to good
A ratio higher than 2.0 is rated as very good
A ratio of 3.0 or higher would be considered excellent
A ratio of less than 1.0 would be sub-optimal
How does Bitcoin compare to other assets?
Source: Woobull Charts - Bitcoin Risk Adjusted Returns
The chart above has been adjusted to use a four year holding period for Bitcoin but you can see its Sharpe Ratio oscillating anywhere from 2 to 4 and well above its peers and putting it into the excellent group of investment assets per the ratio.
We can then say, barring any catastrophe and using the Sharpe Ratio, Bitcoin has been the best performing asset on a risk-adjusted basis over the last decade IF you hodl for a 4 year period.
This hodling, as it's become known, is the key piece...
Rule of ten best days
In September 2019, Thomas Lee of Fundstrat posted the following tweet reminding everyone that the majority of Bitcoin's gains come during the 10 best days of the year.
Excluding 2017, all of Bitcoin's upside was grouped into 10 days or ~3% of the year AND if you missed these 10 days, you would in fact be DOWN 25% per year.
He rightfully then asks "Are you that good at trading?"
So let's do a quick recap of what we've learnt from this post and a few previous ones:
We first established that Bitcoin is the first representation of true digital scarcity and that scarcity is one of the primary ways we value objects and/or assets.
We further established that Bitcoin's current value, like other social networks, is a function of its adoption curve as per Metcalfe's Law which is likely in the early adopters phase.
And in this post, we've established that Bitcoin outperforms every other asset class on a risk adjusted basis and that it's NOT wise to trade but instead hodl to realize potential gains
Taking this all together, it's clear you should spend in fiat and save in Bitcoin. 🤣
Just kidding...nobody is going to do that...yet 👀
What's more likely is that you should #getoffzero and have some exposure - moreover, you shouldn't time the market but instead dollar cost average into it.
What is dollar cost averaging?
The easiest way to get exposure without stress is to dollar cost average into the market. This is the same strategy companies like WealthSimple use to get you exposure to traditional markets through exchange traded funds (ETFs), etc.
Dollar cost averaging or DCA is simply buying a set amount of an asset, in this case Bitcoin or Ethereum, on a regular set schedule. This can be monthly, bi-weekly, or even daily depending on your risk tolerance and goals.
The benefit is that you put your investment on autopilot and avoid stressing about the huge ups and downs in this market. I don't know how many calls I had in 2017 from people that got caught up in the hype and bought the top only to stress all the way down - don't do that.
How to dollar cost average
For both options below, I recommend not holding too many funds in the smart contract or on an exchange at any given time. As always, move funds to cold storage whenever possible as they are more secure than keeping them in hot wallets.
Option 1: Decentralized (5 mins)
Purchase DAI on UniSwap
You will first need to purchase or exchange your tokens for some DAI - a stablecoin - which is the only method of dollar cost averaging on the platform we are going to use. You can do this on UniSwap as shown in my post on using decentralized exchanges.
Get Metamask & transfer DAI
If you haven't already, setup the Metamask wallet extension for your browser. This is the only wallet currently configured for the platform and is probably the most widely supported wallet across the eco-system.
Go to dca.land
Unlock DAI
You will need to unlock your DAI so the smart contract can perform the recurring buys for you without needing your approval each time.
Start the transaction
Finally, start your transaction and watch your tokens magically change from DAI to ETH on a monthly, weekly, daily or even hourly basis!
Option 2: Centralized
Coinberry and Coinbase offer automated recurring Bitcoin purchases. There are probably several more options but I personally haven't explored them. Either way, make sure to take your coins off the exchange on a semi-regular basis.
I plan on posting more ways to invest your money in tokenized assets over the coming months so make sure to subscribe to stay up-to-date on the space!
Around the Space
Shopify integrates cryptopayments through CoinPayments
Shopify announced a new strategic partnership with CoinPayments, a payment gateway for almost 2000 cryptocurrencies. Now Shopify's 2.5 million vendors can quickly switch on crypto payments and receive funds faster than traditional payment gateways. Moreover, clients can pay in thousands of different forms of payment. Imagine selling digital real estate on Decentraland and taking the proceeds in MANA and buying a new watch in meatspace.
Grayscale Investment Trust buys 33% of all Bitcoin mined
Grayscale Investment Trust, one of the few ways institutions can get exposure to crypto without holding their private keys, has been scooping up 33% of all the Bitcoin mined over the last three months. The fund added 60,762 BTC which at today's prices is a massive $535M bringing their total portfolio to $3.37B. With the same demand going forward and the reduction in supply from the halving along with ETH 2.0 in the new few years, this institutional demand will only drive the price higher.
UMA Protocol launches ETHBTC synthetix token
UMA launched their first derivative on the Ethereum mainnet which tracks the ratio of ETH to BTC. Anyone can lock up DAI in the contract and mint ETHBTC tokens. In effect this makes them short the ratio and the buyer would be long the ratio. This is a first step towards derivative markets for anything from the S&P to commodities. Global investors who were once locked out due to access restrictions, etc. will over the next few years have access to the quadrillion dollar derivatives market.
1000 WBTC was minted on Ethereum
In a single transaction, CoinList minted 1000 WBTC by depositing 1000 BTC as collateral and creating 1000 WBTC - a representation of Bitcoin on Ethereum. At the time, this was worth $8.8M and has brought the total amount of BTC on Ethereum to $46M or ~5,000 BTC. Ethereum is already dominating stablecoin transactions with USTC & USDC and it looks like Bitcoin will face the same fate as more tokens are moved over to a more expressive programmable blockchain.
Tokensoft distributed $4M of equity on Ethereum
Tokensoft has distributed tokens to investors that represent the proceeds of its seed round of $4M back in July of 2018. Holders can now receive real-time payment of dividends that can be paid out through traditional banks if they choose. Furthermore, they can buy and sell their shares through the Tokensoft platform. Expect more firms to follow suit in the coming years as it becomes faster to settle on a public blockchain than through traditional systems.
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Disclaimer: Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.