If you are invested in Bitcoin you probably have a big smile all over your face at the moment. The digital currency has gained $5,000 in the last 3 weeks. At the time of writing it stands at $12,600, a 260% return from its low of $3,500 in January. But if you are a hodler of Bitcoin you probably won’t be quitting your day job just yet. Bitcoin is still off its $19,500 peak in December 2017 and spent a sorrowful 2018 in steady decline, eventually losing more than 80% of its value. So if you are invested in Bitcoin what next? You love the upside volatility but the downside sucks.
Capitalising on downside volatility
The obvious answer is to make Bitcoin’s downside volatility work for you. Benefit from when Bitcoin prices rise, and prosper when Bitcoin prices fall. Executed well, the strategy not only improves Bitcoin’s returns, but irons out some of the downside volatility at the same time.
Now this is where it gets interesting. There are essentially three ways you can profit from Bitcoin’s volatility:
1. Short Selling
2. Bitcoin Long/Short Hedge Fund
Short selling is for people who believe they can predict when Bitcoin’s prices are going to fall. If you are a trader and believe in your system then this is a way to go. Today there are many ways to short Bitcoin including simply shorting on an exchange, shorting Bitcoin futures or Tracker Funds, or buying put options.
Long/Short Hedge Fund
A second option is to invest in a long/short Bitcoin hedge fund. Traditionally the whole point of investing in a hedge fund was to allow a professional manager to seek absolute returns irrespective of what the market was doing through their acumen of when to be long and when to short.
In return for this expertise investors are generally expected to pay 2% management and 20% performance fees to the manager. At present my research has not found any hedge fund that is exclusively long/short Bitcoin. If you know of one please let me know.
The third option is Bitcoin Enhanced. We established Bitcoin Enhanced as a currency like Bitcoin in order to give it all the characteristics that people invested in Bitcoin are likely to value. These include Bitcoin’s decentralised blockchain structure and limited supply. Perhaps most importantly for the savvy investor whose distrust of the fiat financial system may have first led them to Bitcoin, Bitcoin Enhanced tokens are also outside the systemic risks of the fiat system. This is because token holders give Bitcoin Enhanced tokens their value in the same way Bitcoin owners give Bitcoin its value. This makes both currencies independent silos of value — the life blood of effective portfolio diversification.
Next we added to the price of Bitcoin our Phi Algorithm as a means of forecasting when those prices are likely to fall. The algorithm uses the natural way living systems unfold according to the Golden Mean to make its predictions. We then waited 18 months to build a track record of how well the algorithm worked in practise.
Finally we employed an often overlooked feature of finance, people’s ability to keep the value of a financial product pegged at a specific price. This enabled us to track a simulated long/short strategy rather than having to actually buy and sell Bitcoin — an essential step if we were to keep Bitcoin Enhanced outside the financial system in the same way Bitcoin is.
The result is that Bitcoin Enhanced tokens are designed to track a Target Price that is a combination of Bitcoin prices plus the effects of shorting Bitcoin when the Phi Algorithm gives a signal. So while today Bitcoin is at $12,600, the Bitcoin Enhanced Target Price is at $22,157 as a result of successful short forecasts since February 2018.
What is next for you?
While traders have a range of methods they can use to short Bitcoin, Bitcoin Enhanced with its Phi Algorithm seeks to do this work for investors. It is structured to perform while preserving the essential features of independence from the fiat financial system, anonymity, decentralisation etc. which probably attracted people to Bitcoin in the first place.
We are not saying there are not downsides to the Bitcoin Enhanced approach. For example the Phi Algorithm could fall off its win rate. Tokens may also face liquidity shortages making it difficult to exit. Bitcoin’s value may itself collapse due to a bug in the code. Any investor needs to be aware of risks like these and make their own decision. However we have done our best to preserve what we believe people value in Bitcoin while shorting some of the currency’s downside volatility.
The approach can have a beneficial effect on an investment portfolio. Not only can it give better returns than Bitcoin during a bull run, but it can also limit the downside of the currency.
For example, while Bitcoin fell to $3,300 during 2018, the Target Price of Bitcoin Enhanced remained above $5,500 due to its correct short forecasts over the preceding months.
We believe Bitcoin works because people want the kind of investment that it represents. Autonomy, lack of third party control and privacy, are powerful human desires. Bitcoin Enhanced seeks to preserve these values while capitalising on some of Bitcoin’s downside volatility. It aspires to be “Bitcoin plus more”.