Then there is the flipside of the coin: the disruptive technology is still on beta. So far all is fine, but nobody gives any guarantees. Despite that by reading about Bitcoin you gain more confidence towards it in all levels, there still are many known threats and dangers, technical and political, and sometimes also unknown things happen. Unbelievably few understand bitcoin even now. It is an unknown thing to them. To keep things simple, we postulate that Bitcoin is in a constant danger of self-annihilating, and its exchange value going to zero. This is not necessary the most realistic negative option, but serves as a good counterweight to the mind-blowing positive case.

The Rake, or SSS System for Investing Bitcoin

The odds are so much on your side that there is no reason to take any risks. If it goes up, any number of bitcoins makes you rich, and even if you have zero, you will still be richer than before Bitcoin (I do not own any shares of Facebook, but acknowledge its importance and the benefits that I get for free). If it goes down, you should only lose slack money, money that you did not need anyway. You cannot lose more than you put in, so don’t put in more than you can afford to lose and you’ll be all right, even in the most negative case.

First you need to find out how much you have. To keep keeping things simple, take first aside all the things that you need. They are not counted. Then calculate the resale value of the rest of your things, subtract all debts, and you find your financial net worth. Since house is so big, you should count house equity toward the total, but if you prefer thinking it as separate, you can also decide that you ‘need’ it and not count it. In this case, do not subtract the mortgage either.

Then you select the rake. You know the concept from poker establishments: some percent of all winnings goes to the house. With bitcoin we except great gains, so we want to ‘tax’ them to increase our living standard, or just to keep some diversified in case the negative event happens and bitcoins lose their value. The rake is the percentage to set aside, every time that the price doubles. If for example you select 10%, this will lead that 20% of your portfolio is in non-bitcoins and 80% in bitcoins. If you select 20%, the result is 40% in bitcoins/60% non-bitcoins.

For most of us, the previous percents sound extreme. But they are my recommendations. Remember, you do not need to invest more than you can afford to lose. In purist case, selecting a 10% rake would require you to invest 80% of your liquid wealth in bitcoins. But if that does not feel comfortable, you can invest 10% instead. In this case you can boost the accumulation by not raking your pot in the first doublings, only after it has increased to your target of 80% of your financial net worth.

The price now is about $1 per mBTC. (It is very much likely that we will spontaneously revert to mBTC when the average investment is no more even one bitcoin. So let’s start it now.) First doubling is at $2, then at $4, $8, $16, $32, $64, $125, $250, $500 and $1000. So there are 10 doublings in total, which take the price up 1,000x. In the end, one bitcoin is worth $1 million, and one dollar is worth quite much less than it is now. The plan ends there because the world will look very much different. Before that, you stick to the plan: if it goes to zero, you net a small gain or a small loss.

Let’s take an example of a person who only now finds bitcoin, has $50k in liquid assets, but is unwilling to risk more than $10k. His rake level is 10%, which starts immediately.

Code:

Price   mB             k$     mB      Other   Total    BTC%
        left    sold   out    val.    val.    value
2       9000    1000   2      18      42      60       30 %
4       8100    900    4      32      46      78       42 %
8       7290    810    6      58      52      110      53 %
16      6561    729    12     105     64      169      62 %
32      5905    656    21     189     85      274      69 % 
64      5314    590    38     340     123     463      74 %
125     4783    531    66     598     189     787      76 %
250     4305    478    120    1076    309     1385     78 %
500     3874    430    215    1937    524     2461     79 %
1000    3487    387    387    3487    911     4398     79 %


The important parameters are:
- Purchased 10,000mBTC, in the end he still has 3,487mBTC.
- Recovered initial investment of $10k in full when mBTC hits $8.
- In the end his fiat+other stuff stash is worth $0.9 million.

Discussion:

It is important to buy in as soon as possible, because waiting has in general not been a good strategy with bitcoin. Even if price drops afterwards, you should not feel any remorse at all — we are counting towards $1 million or nothing. If ‘nothing’ happens, you lose as many dollars, regardless of purchase price. If $1 million happens, then yes you have a smaller number of coins, but think how many are not even reading this advice, much less acting on it! Buy, and do it now. And only with funds that you can afford to lose. If you buy, and it crashes, but you have gained more determination that it is a good thing in the meanwhile, you can buy more.

When the plan is underway, and it crashes, I don’t advice to buy back. Enjoy your rake rather. Bitcoin may continue to go down, you don’t know it. Even if it goes to zero, you will have gained. If you need to pay taxes on the realized gains (as most of us do), it makes even less sense to go in and out.

If you want to daytrade, do it entirely separate from this, so that your daytrading has no effect on the execution of SSS plan and vice versa. In the end you will see, which one was more profitable and better use of time.

It is possible to make the selling effectively continuous, instead of discrete. You just send 10% of your coins to an exchange and divide the next doubling to small enough increments (say, 10 of them) and list your coins for sale. This way you get to sell every time the price rises to a new ATH. Because ATH’s happen on times when Bitcoin is ahead of the trend, the timing of the selling is better than average.

It is entirely your own decision, how to allocate the non-bitcoin portfolio. Local differences dictate the prudent course of action. I have in the past tried to keep all forks of Bitcoin equally but choosing which one to focus on is an exercise left to the reader.

Thank you, and don’t forget rule number one, buy Bitcoin :)