I have been a gold bug for most of my life, and normally put a substantial portion of my savings in gold. However, since 2013, gold hasn't really been functioning properly as the hedge against inflation that I look for it to be. I suspect the reason for gold's non performance for the past five years has something to do with central banks constructing derivative markets around gold combined with a large quantity of "paper gold" financial products that are fractional reserve. Regardless of what the actual reason might be, I have an interest in accumulating gold by trading.
Recently I found a simple way to do that which is working pretty well so far. Vaultoro is an online exchange market between Bitcoin and gold. The liquidity of that market is pretty good, with volume ranging from $1M to $20M per day, which is more than sufficient to support my small time trading.
My algorithm is as follows. When I opened the account (with Bitcoin) I split the value 50/50 between Bitcoin and gold. Every day, I log in and check the relative change in the portfolio. Say, for example, that my Bitcoin balance is worth $1250 and the gold balance is worth $1100. That means Bitcoin went up against gold since yesterday.
Next I subtract the lower value from the higher value and then divide the result by 2. ($1250 - $1100) /2 = $75. Now I sell $75 worth of the higher value account, Bitcoin in this example, at the market price.
The result is to re-balance the portfolio to 50/50 by value.
Following this algorithm, as Bitcoin goes up, I accumulate gold. As Bitcoin goes down, I accumulate Bitcoin. The high volatility against Bitcoin makes it the perfect trading partner against gold. Over time, my portfolio gradually accumulates more Bitcoin and more gold, which I can eventually take delivery of.
This method works over long periods of time (months) to accumulate more Bitcoin and gold. In the short run, I might miss the full potential to benefit from being long on Bitcoin as its price doubles. But when the inevitable 50% retraction occurs, this method buys the dips.
I started using this method about six weeks ago, and my portfolio is up 66% in dollar value. During that time Bitcoin price is up about 90%, so I did not maximize my Bitcoin gain. But I accumulated more gold.
This method can be used between any two instruments on other exchanges like Poloniex. Using this method you could trade between Bitcoin and Ethereum, for example.
What I like about this method is that it doesn't keep me up at night worrying if my long position on Bitcoin or Dash will get wiped out by a dip. It is relatively low risk. Even if I only re-balance once a week or once a month, the method still works. But it is most effective if done at higher frequencies.
Advanced Version
Trading exchanges have historically been the riskiest part of the Bitcoin ecosystem. Lots of exchanges have failed for various reasons. Therefore, it is important to protect oneself from the risk of the exchange itself failing. If you wanted to use my method you could limit your risk like this:
- Use 50% of your savings to buy bitcoin and 50% to buy gold.
- Put 80% of your Bitcoin into a secure offline storage device or cold wallet.
- Take delivery of 80% of your gold, from whatever source you get it from.
- With the remaining 20% of the Bitcoin and 20% of the gold, use Vaultoro to trade to balance the portfolios.
Using that method, you keep 80% of your savings under your control. You are only risking the 20% used to trade. When you calculated the account values of your portfolio, count the gold and bitcoin under your control as part of the total portfolio.
May 27 Update
At the peak Bitcoin price of $2700, my portfolio was up 110% using this method. When Bitcoin corrected down to $1900, this algorithm had me selling gold for BTC. With the Bitcoin price around $2000 my total portfolio value in dollars is back around 190% of where it was when I began (90% gain). I now have more gold grams and more Bitcoin than when I began.
The spread between buy and sell orders widened massively as a result of the high volatility of Bitcoin. Everybody seems to want to buy the Bitcoin dip, creating a bit of slippage while shifting gold to Bitcoin.
Declaration of Interests
I actively trade on Vaultoro using the method described here. If many people copy my strategy on that exchange, it will tend to suppress volatility, which goes against my trading interests. However, I also used my affiliate link to Vaultoro above. If many people follow the link and open accounts, I may benefit from any trading fees generated. I do not think either interest is financially significant enough to bias my perspective.
Ha, neat! After I followed you I checked your profile to see if I had read other articles you wrote. There was only one other -- and it's what motivated me to join Steemit a week ago! I believe someone on ZeroHedge copied a link to it in a comment there. (Or maybe Trollbox? Somewhere other than here, anyway... :) )
I haven't yet copied your strategy, but I do remember reading it and thinking it might nicely apply to a trading pair, like BTC/LTC, or BTC/ETH. I had made a note to consider writing a bot for it, but then forgot about it. So -- thanks also for the reminder! :)
Had a similar thought about this with BTC/ETH. I guess you could easily go back and run a simulation. Of course once thing to consider is all the taxes to declare What a nightmare. I just hope one day we can get BTC and ETH in our 401Ks and IRA accounts...
Hey I was on vacation and missed responding to a few posts. Check out http://losthorizons.com, and Pete Hendrickson's book "Cracking the Code" which he sells there.
Long story short: you only owe taxes if you got money from the federal government. If an individual, or a corporation, paid you, then you don't owe taxes.
Form 4852 is the key, but it's worth the $25 to get the book. Hope this helps!
Thank you very much it looks very good, however I'm not sure if I can actually trust them to keep my savings or not. Do you?
I'm also interested to know how gold is growing over time? Obviously not as fast as BTC these days but it should be more stable right?
Vaultoro has been stable for the past three years. But I cannot guarantee they will always be.
If you wanted to use my method you could limit your risk like this:
Using that method, you keep 80% of your savings under your control. You are only risking the 20% used to trade. When you do the trading number, count the gold and bitcoin under your control as part of the total portfolio. Does that make sense to you?
You can get your physical gold from Vaultoro? isn't it against most of countries law to personally store gold? and how they send it over to me without taxes, with post?
I have not tested the delivery feature. But they explain it here:
http://support.vaultoro.com/knowledgebase/topics/70060-physical-gold-delivery
Hey, just wanted to say thank you. I used this service today to protect the deflation of my bitcoin holding. Crazy market haha
But you do not need gold from Vaultoro to keep 80% offline. You could obtain physical gold from any source. If it is illegal in your country, you could open a box at http://www.thesafehouse.sg/ as an example.
"I'm also interested to know how gold is growing over time? Obviously not as fast as BTC these days but it should be more stable right?"
The value of gold is extremely stable over time. So you will never get rich by holding speculating on gold. But it is a good way to store value longer term, as well as to measure value. So, by trading Bitcoin which goes up and down a lot, against gold, I gradually accumulate gold and bitcoin. If Bitcoin price crashes, since I have been storing gains in gold, it limits my loss.
hello @belerophon please i will love to ask you some questions . am abit new , hope to hear from you soon
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oh this is great!!
Good job , upvote me too
Im newcomer. pls follow and like me
Thank you for your post...feel free to check my link regarding buying gold online and save in secure vaults:
https://steemit.com/gold/@ka82/online-gold-silver-platinum-investment
Very interesting. How much did your gold and bitcoin holdings increase in percentage terms since you began this process?
their charts looks very similar on different time scale: https://steemit.com/bitcoin/@trisolaran/striking-similarity-between-gold-and-bitcoin-charts, but I'm surprised this would work in short period. Maybe just lucky since during your trading period, bitcoin up 90%. but thanks for sharing, will take a look.