Posted in Cryptos
People new to Bitcoin may want to consider the 3 Bitcoin Rule (3% of total), since investors unfamiliar with Bitcoin have many stories involving mistakes of selling too early, or jumping in at the wrong time due to the panic of missing a trend. Fear of missing out (FOMO) and fear of losing everything (FOLE) both destroy the success of most investors and at the heart of both lies a lack of discipline. In addition, seller’s remorse can give a person regret, even if they sensibly sold for something of value; it takes discipline to get the context of a situation. Most new investors won’t master discipline in a day, but there is a way in the case of Bitcoin and other crypto-tokens that new investors might minimize their potential to make mistakes: the 3 Bitcoin Rule. What is this rule and how might it help investors?
Suppose that Andrew has 100 Bitcoins and wants to make sure that he never gets caught up in FOMO or FOLE. Andrews decides that he will always keep three bitcoins no matter what. He won’t try to out-think himself here with these 3 Bitcoins; he will simply keep them forever in a combination of wallets. The other 97, he may sell, then buy back later, or use, but his 3 Bitcoins will never be touched.
The 3 Bitcoin Rule here is 3% of the total, though for some people this may be more or less, relative to the amount of Bitcoins that a person has. For a person with 1 Bitcoin, this would be 0.03 Bitcoins (examples with 100s make memory easy, so that’s why I use them). If a person wants to “automate” their discipline, this rule might make sense for them so that they avoid the rush of FOMO, FOLE and seller’s remorse. Some investors have mastered the timing of a buy or sell, but for new investors – especially new investors with Bitcoin – it helps to have some “stake” to avoid committing an error.
I met one of the smartest bitcoinaires at a meetup in downtown Dallas, who interacted with Satoshi on the bitcoin forums and was one of the earliest adopters. He sold his bitcoins to pay for student loans and felt regret at selling the too early, even though I would argue he made a good trade. However, seller’s remorse can happen and we can mitigate it by simply following this 3 Bitcoin Rule. In our minds, we’ve “lost” these forever, so we don’t debate whether we made a mistake when we sold some or not. It also helps us avoid the “I’m missing out on a rapid increase in price right now” because we have some riding on the rise.
This is one of my favorite methodologies for stocks and it’s been effective at keeping me disciplined. Think of the example where Jason buys 15,000 shares of Dillards at $1.50 in 2009, and sells 10,000 shares when Dillards rises above $120. He makes over $1.2 million in his trade and he still has 5,000 long (which in this case of Dillards also pays dividends – $0.28 per year). Whether Dillards rises or falls is irrelevant to Jason; he has 5000 shares no matter what and he’s made bank on the majority of his position – he can have no regrets, as this was a winning trade (again, in this case, his 5,000 shares are also yielding him $1,400 a year, or 28% of his original principal). Since Bitcoin does not yield, the yield example does not apply in Bitcoin’s case.
While this technique will help beginners, especially beginners who feel susceptible to FOMO, FOLE and seller’s remorse, advanced traders might view this as wasteful even if the original principal is green. Advanced traders like to think that they can understand and time markets perfectly, so this own’t resonate with them. The reason I trade so well is that I accept the fact that I will never be advanced; in fact, I think that humility is one of the most powerful of all trading tools, along with discipline. This techniques automates discipline by removing the decision making process.
Still, one could argue merit in liquidating an entire position, if the circumstance calls for it. A person should realize that if he chooses to never liquidate a position, it’s possible that he could see that position fall to zero, if a situation causes it. Provided that the person understands this risk (failure is guaranteed), the 3 Bitcoin Rule may have value for this particular trader.
One can apply this same technique to other tokens as well. In addition, one can also apply this to stocks, ETFs, mutual funds, etc; this rule can make sense in any situation where FOMO, FOLE, or seller’s remorse might exist.
The following article covers a token or element in the cryptosphere. The cryptosphere is new and exciting, but changes rapidly and often in ways that do not benefit users. By the time this article is published, changes may have already occurred. Most tokens in the cryptosphere are complete scams that are get-rich-quick-schemes for insiders. Often, we cannot know this beforehand and only later discover this. A person should only trade with money that they’re willing to lose because losses are guaranteed. If you choose to participate in purchasing a token in the cryptosphere, you should do so with the full expectation of a loss and you should also expect it to change in a manner that does not benefit you. There are very few good ideas in the cryptosphere. Finally, by reading this post, you agree that you’ve read our disclosure.