Is the trend for Bitcoin prices still holding up? I’m taking another look at my Kelly allocation strategy.
I’ve got a solid chunk of my investments in Bitcoin. My allocation isn’t just some random guess; it’s all calculated based on the Kelly Criterion which weighs Bitcoin’s expected returns against the chance of a price model failing. But you know, a model is only as good as the assumptions behind it. So in this post, I want to go through some risk indicators with you.
Every now and then, I like to stress-test my two main assumptions that my Kelly allocation is based on:
(1) Is the long-term price trend for Bitcoin still legit? and
(2) How likely is it that this price trend will break down?
The aim here is to figure out whether I need to tweak my current portfolio allocation of 60-75%.
Breaking down my Bitcoin allocation: two parts
My allocation splits into two main parts:
❶ Safety-bucket from Bitcoin’s core properties (30% Allocation):
Even if the price doesn’t really go up compared to fiat money, I would still keep a large part of my wealth in Bitcoin. This 30% is all about security and sovereignty. Think of it as my digital gold, but even better since I can control it myself and move it across borders with just a seed phrase. These features mean it’s tough to censor or take away from me, even by a hostile government. This portion of my investment doesn’t depend on "number go up."
❷ Yield-bucket from the Expected Return using the Kelly Criterion (up to 60-75% Allocation):
History has shown some pretty interesting price trends in Bitcoin. To figure out how much more to invest for those "number-go-up" reasons, I use the Kelly Criterion. This requires t...
I do agree to your general conclusion.
Currently we are somewhat at the floor level, maybe 1 step further down (~50k$) within the next month, but then BTC needs to recover to stay within the model. If there is an AI-Bubble and if it is bursting during that time, i guess we will fall deeper and break the model.
In addition to that i believe that your model is a little inaccurate (worse than reality), because it is measured in BTCEUR not in BTCUSD. If you have a look to USD/EUR the USD increased his power since 2009 a lot. We have seen that in the last bullruns second top compared to the first top: while it was almost the same in BTC/EUR (+1,5%) it was remarkable highter in BTC/USD (+15,6%). In that case i think the weakness of EUR/USD exaggerates the weakness of BTC(/USD) in your model.
I think the problem can be seen in this chart if you look into the details (it's not the first time I criticise this ):
Looking at the right side of the left chart, you see that the bullish peaks are increasingly lower in comparison to the trend. For me, that is a sign that the trend should be recalculated and be less steep. There's a high chance that in this case the current price would be totally fine and not close to the bottom of the "trend area". A hint to this is that we only lost around 50% from the peak, but it looks already as "dangerous" as the 75%+ crashes in the past.
Maybe it even would make sense to ignore the data before 2013 completely. The market was extremely immature at that moment. And the price was also probably manipulated by MtGox with the "Willy" bot during some time. So the exact character of that curve, in my opinion, has very low predictive value.
It would be interesting if you recalculate the trend with a function which gives more importance to the 2021 and 2025 bulls, and less to the previous (immature) bulls.
Overall, i think Bitcoin will still follow the trend. But as more and more people are aware of this trend, i think there will be a time it will break or slow down very much that Bitcoin might reach that point of stability. But let's keep hope up. The price of Bitcoin came as a result of adoption. Something caused it. And if another thing of similar event comes again then the trend will continue as it has always being.
Because of the bitcoin halving had kept hold to occur on every four years which also is the evolvement of the bullish and bearish events that happens quadrennially.
With all these bitcoin market events investors had also tend to have certain psychological behaviors and with how they reacts to the market following the market events, it is possible for the price trends to last but I can not guarantee forever because the future is uncertainty otherwise, the potential influence of analysts and traders majorly selling off their bitcoins out of Fomo after market price reaching new Ath in the bull events and investors prepares to buy in the bear event at the course of buying cheap and holds for the next four years cycle, the trends "may" be sustainable and so on it encourages adoption to adapt the psychological senses of actions.