Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
This article is intended to aid the reader in creating their own Bitcoin investment plan. It begins by defining a foundational approach to risk assessment with respect to Bitcoin. After defining and understanding risk, the focus shifts towards how to create and execute a plan of action that is in line with two high-level investment objectives: wealth preservation and wealth accumulation.
Step 1: Identify Opportunity in Risk & Set Goals
The very first step in any investment plan is to identify the opportunity and define value and risk. For the purpose of these writings, we will not go into great detail when defining the opportunity, value, and risk of bitcoin as an investment, seeing as that would take away from the main focus, which is about building an investment plan around bitcoin. With that said, it is encouraged that everyone to do their own research.
Bitcoin represents the best hedge humanity has against the economic principles that prevail in all fiat currencies around the world. Yet, despite its revolutionary nature, bitcoin should be treated as a binary investment. This is because over the long-run the idea of a decentralized digital global currency will either work or it won’t - moon or bust as they say. In so far as this pertains to defining risk within an investment plan, the variable to take away is that the value of a bitcoin has a chance (albeit an increasingly smaller one as the years go by) to go to zero. Hence, an understanding needs to be put in place. Should the investment go to zero, how bad will the impacts be? This question needs to be answered truthfully and the answer internalized before buying a single satoshi. Say, a person chose to invest 50% of all their income and 50% of all their liquid assets over the next 5 years into bitcoin. This means that they are saying, "I will survive if half of my income and wealth disappear over the next 5 years in an effort to reach my investment goals and I will be ok if I had to start my portfolio from scratch on the 6th year".
With all of this said, if bitcoin does survive long-term, the value it holds as a sovereign currency with a fixed monetary base will be orders of magnitude greater than the value of any fiat currency. It could be argued that bitcoin would be the most valuable asset/money/technology/idea that humanity has ever created. And to capture and realize this value, good goals are essential.
So having understood the risk and the potential value, the next step in the investment plan is to write out the ultimate goal(s). Below are good questions to ask when starting to think about investment goals:
- What kind of return on your money will make you happy?
- How many years do you plan to invest for?
- Do you plan to live off of the residual income the investment provides in the future?
Some examples of good goals would be: I want to make $1,000,000 in portfolio value over the next 10 years and live off the residual income that the $1,000,000 provides in perpetuity; or I want to secure 25% of the total wealth I currently have and protect its purchasing power for the next 100 years. At the end of the day, each individual will have different investment goals based on their circumstances. And circumstances change, that is why the investment goals should be revisited annually to adjust for any changes in income, lifestyle, health, family, etc.
In summary, the foundational elements of a strong bitcoin investment plan consist of: having conviction in bitcoin's value and opportunity; the acceptance/management of risk; and properly defined investment goals. Having these elements ensures an investment plan is on the right footing for long-term success and is a great way to reduce the stress involved in the whole process.
Step 2: Create a Plan of Action for Wealth Preservation
The next step in building a bitcoin investment plan is developing an efficient execution strategy - a plan to achieve the goals set out in Step 1.
In general, bitcoin investment goals made in the first step will fall into one of two categories - wealth preservation or wealth accumulation. Each have their own considerations when it comes to creating a plan of action. Regarding wealth preservation, the main thing to note is that the investment horizon is technically infinite. This is because preserving wealth against the affects of seizure, devaluation, and natural disasters is a never-ending endeavor, which is often done over multiple generations. With wealth creation, the investment horizon is usually more finite and the proceeds of the accumulated wealth are usually there to support a specific lifestyle.
If the goal of investing into bitcoin is wealth preservation, it must be noted that bitcoin alone should NOT be the only vehicle servicing this goal (recall from the previous step that only a fraction of net worth should be held in risky investments). With that said, wealth preservation is achieved by converting a portion of total wealth into bitcoin. Depending on the amounts required, the best choices for acquiring bitcoin are as follows:
Purchasing bitcoin from friends or a person you trust in your local bitcoin community is the best way to buy smaller amounts of bitcoin ranging from $10 to $2,500 dollars. The bonus here is that the bitcoins purchased are obtained with a high degree of privacy if cash is used in the exchange.
This is another good way to buy bitcoin in amounts ranging from $20 to $5,000 dollars. There are many locations across the world and finding one is more likely than having friends with bitcoin that are willing to sell. The downside is that most ATMs require verification for purchases over a certain amount as defined by their regional laws.
Creating an account on an exchange requires some time, ID verification, and knowledge of how to deposit funds onto the platform. Also, understanding elements of the interface and order types are necessary. With that, exchange fees are low and users can purchase large amounts of bitcoin, usually between $100 - $100,000 dollars before the effects of slippage kick in, making it a cost (but not a time) effective way to purchase bitcoin.
Brokers & OTC Desks:
Individuals looking to purchase amounts of $50,000 or more, who do not want to mess with trading interfaces and slippage can verify with an OTC desk or broker and buy bitcoin directly through them. This is usually done with a bank wire or other bank to bank payment channels. The advantage of submitting identifying information to a brokerage firm or OTC desk is that it limits the sharing of personal information to a single financial entity that usually has strict data protection protocols.
Once the amount of money devoted to the investment is decided and a method for purchase is chosen, the next step is to set the frequency of purchasing. The easiest one is a single big-buy. This allows the instant fulfillment of the investment plan and gives the ability to focus on other areas of life until it comes time to review the plan at the end of the year. The other option is to split the purchase into several tranches and spread the purchases over time, ideally buying when bitcoin is considered undervalued. This approach, however, requires intense research and understanding of where the market currently is and where it is going. This all implies more work, as is borderline an attempt to "time the market," which (as many people have learned the hard way) is predominantly based on luck. The better option is dynamic Dollar Cost Averaging (DCA) - you can learn more about the method here.
Step 2.5: Create a Plan of Action for Wealth Accumulation
When it comes to developing the logic behind a wealth accumulation plan the basic idea is to take fractional amounts of existing inputs and convert them into bitcoin, while balancing the impact that those conversions have on a person's immediate and future lifestyle. For example, a person has a paying job and converts 5% of their weekly earnings into bitcoin. This is a small enough portion of their total salary such that it is unlikely to affect the person's current lifestyle. However, this investment over time could greatly impact their future lifestyle due to the effects of compound interest. The not-so-pleasant reality of this logic is that the effectiveness of accumulation scales up with a person's ability to generate money. So a person earning $1,000/hr will have an easier time with the balancing act than someone who earns $10/hr, if they both share the same vision of retiring with $10,000,000. And the only ways to compensate for lower earning power are either to redefine the target amount or to make more money. Despite this skew, the investment methodology for accumulating wealth stays the same and focuses on buying bitcoin frequently and consistently over a period of time. The next example illustrates the power of this methodology and what it means for the average bitcoin investor focused on accumulation.
Moving onto how much to invest and when. With current interest rates, if a person saves $100 a week with the goal of retiring on a million dollars, they would need to save for 10,000 weeks (or 198.1 years) to reach $1 million. However, if they apply the same methodology to converting their money into bitcoin, the results may be vastly different. Since bitcoin's deflationary nature will continue to drive price upwards in the long run, it would be a conservative estimate to assume an average return of 20% every year for the next 100 years. With this growth rate, the same $100 a week now nets $1 million dollars in only 28 years - a much more realistic timeframe. The advantage in stacking bitcoin even for the smaller investor is very clear.
Running a similar example and changing the variables offer a good way to understand how much to invest and when. Play around with this calculator to see how different contribution amounts, rates of return, and investment horizons affect the final total earned. Use this to figure out how to adjust your unique financial balancing act to produce the desired results.
Finally, since the time horizon for accumulation is finite and the final amount of desired wealth is dependent on the frequency of contributions, consistency is key. Thus, it's best to plan to make accumulating wealth a process that is as automatic as possible. It's tough as it is to spend time going to the bank, wiring money, paying the fees, and waiting multiple days for the funds to clear. It is even tougher to do this every week for years on end. For this automation to occur, it is recommended that DCA platforms be used. If an automated DCA platform is not available in your area, then the next best option is bitcoin ATMs. In this scenario, the process of depositing cash in exchange for bitcoin is not much longer than stopping to withdraw cash at a normal ATM - but at least you will achieve the desired result. If if there is no bitcoin ATM near you, the last (and least favorable) option would to use exchanges, OTC desks, and P2P trades, in that order.
To recap, bitcoin investment goals fall into one of two categories: wealth preservation or wealth accumulation. The main difference between them are their investment horizons, one is infinite (preservation) and one is finite (accumulation). This difference in total lifespan alters the foundations of an investment plan and changes 1) the logic and methodology behind investing; 2) how much to invest and when; and 3) what platforms are best to invest through.
Step 3: From Motion to Action
Whether one is investing into bitcoin with a wealth preservation or a wealth accumulation mindset, a plan alone is worthless without execution. So what matters when it comes to successfully executing a bitcoin investment plan? The three key elements are: consistency in investing behavior, emotional control, and tax planning.
First, consistency. Regardless of whether the plan is to preserve wealth via dynamically dollar cost averaging (DCA'ing) a million dollars over 6 months, or building wealth by accumulating $100 each week over 20 years, consistency goes hand in hand with execution. The reason they go so well together is that each plan has a mathematical foundation that works with averages and the best way to replicate that average in real life is to be methodical with the frequency at which measurement is taken. In other words, consistency helps get real world results closer to their mathematical models. And the closer the real-world average price/growth is to the mathematical model's average price/growth, the closer the expectations (profits) will be to their projected figures. And the more sanity an investor will retain! Along with striving for consistency in executing an investment plan, controlling emotions is just as important.
Even the most diligent investor will fall prey to emotion when executing consistently on a plan. This is because even with perfect execution, outliers happen. When investing, whether with preservation or accumulation in mind, it is possible to start executing a buying plan at a market macro top. It is also possible to get lucky and catch the bottom. With these very rare outcomes (and all other significant outliers), come emotion. This emotion can be dangerous as it will act as a form of pressure that will make diligent execution of the original plan difficult. Imagine buying at the top and having to hold for 5 years before breaking even as prices go back to where they were. Imagine buying at the market bottom and feeling the pressure to sell in 3 years after a 3x, only to see bitcoin skyrocket 10x after taking profits. The point is that bitcoin will always have outliers in price and the only way to minimize those swings is to stick to the plan while focusing on the goal, regardless of what the market makes you feel on any given day.
Finally, a topic most bitcoin investors dread... taxes. Yet, tax planning and creating the proper infrastructure early is a key element to executing effectively on a trading plan. There are too many considerations to list here, including but not limited to: jurisdiction, tax rates, tax vehicles, budget, citizenship, etc. So it is wise to consult a professional. However, what can generally be said is that the more someone is planning to accumulate or preserve, the greater consideration that should be taken to making sure that the investment is carried out with vehicles that accommodate for the end goal. And with both a sophisticated tax plan and a simple one - record keeping is essential. After all, it is the records that legitimize the transactions in the government’s eyes. Thus, it is highly recommended that ANY and ALL wires, e-transfers, SEPA-debits, wallet to wallet payments, exchange logs, banks statements, etc are kept in an organized fashion. This is easier said than done, but in 10 years when the portfolio is worth north of 7 figures and the tax man is cometh, each one of those records will be worth their file size in satoshis. At the end of the day, having to worry about how to optimize paying taxes is a good problem to have, as it means the investment journey has gone well.
With all that said, everyone's investment journey into bitcoin will be different. Everyone's goals will vary based on their desires; everyone's plans will fit their situations and circumstances; and everyone's execution will be their own - fraught with pleasure and pain. Hopefully with the information contained within these writings, some of those emotions can be minimized and goals more readily understood and executed upon.