Bill Poulos — Bitcoin Investment Strategy

Bill Poulos offers his expertise to help individuals invest more simply while properly managing risk. He has personally been trading in the markets since the 70s. Bill is founder and president of Profits Run, Inc. Here Bill Poulos gives his thoughts on strategy when investing in the cryptocurrency Bitcoin.

Like a lot of markets in their infancy, Bitcoin has proved to be a very volatile trading vehicle.

I believe last May 2017 Bitcoin was trading around $2,500. Since last May, Bitcoin has enjoyed an almost non-stop gain week to week, month to month, which culminated in a parabolic move up in December 2017 to the $20,000 level.

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In any market, Bitcoin or otherwise, when you get a parabolic spike higher like that, it’s going to come right back on down the other side — in rapid fashion.

That’s exactly what happened with Bitcoin into January 2018 with the lowest point around $9,400, then all the way down to the $6,000 area in February 2018.

At that time, Bitcoin needed time to consolidate and test support at that level, which it has now done successfully, and is moving back up. It is now back up to around the $8,500 level.

For long term holders of Bitcoin (or any other stock, or bond, or trading vehicle), the challenge is what does long term mean, and when do I sell, if ever? (Because, you can be sure that Bitcoin will at some future date drop again by 50%.)

A technique you can use to avoid that kind of risk, is to simply plot a monthly chart of Bitcoin that shows each bar or candle for one month of price.

On that chart you plot a 10-month simple moving average, which is simply adding up the last 10 months and dividing by 10. The last 10 months of monthly closes, dividing by 10. Then you stay in your position until a monthly close closes below that 10 month simple moving average. At that point, you go to cash.

Now, that won’t get you out at the very top. That’s impossible. But it will allow you to sidestep a 50% drop.

And if the market is not through going up, and it goes on to close above the recent high just prior to when you went to cash, then you just get back in and ride another leg up and do the same thing over again.

Now, you’ll give up something in the process. If that were to happen, if it were to continue higher, in retrospect you would say, “Oh, gee. I shouldn’t have gotten out.” But on the other hand, that’s unknowable. And the goal here is not to suffer a 50% loss. So, that’s the technique.

Now of course, that’s all based on historical price action going back for years and years and years. That doesn’t mean there’s a guarantee that you can’t suffer a total loss.

Nothing is guaranteed.

So yes indeed, Bitcoin could go to zero, in particular if there is a globally coordinated central bank intervention, it could drive Bitcoin to zero. This is a black swan type of event that could occur. And no technique would protect you in that event.

My guess is that Bitcoin is in its infancy, and that you’re going to see the $20,000 high taken out. It could be as early as late 2018. Bitcoin’s high will be taken out with a strong closing high (monthly closing high) which would allow it then to move up to $30,000, $40,000, $50,000. Not necessarily all in one year.

The outlook for Bitcoin appears to be very positive, but nothing’s guaranteed. And there could be some intervention that completely causes it to drop to zero. So, don’t mortgage the house.

You should only invest in something this speculative with a small percentage of your total portfolio. So that if it did go to zero, it wouldn’t hurt you.

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