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General DiscussionTo Diversify or not to Diversify, lets compare.

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Moderator: Ultimatebtc

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tabrisli
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To Diversify or not to Diversify, lets compare.

Postby tabrisli » Fri Dec 08, 2017 7:37 am

***Disclaimer, experiences during the writing of this article is subjected to the situation at that time. It is best to assess if the subject is still relevant at the point in time of your visit.

We will no doubt eventually reach the question, should I put all my money in one good coin, or spread the money in a number of good coins.
Let's begin to analyse.

Assumptions:
1. The goal is to maximise wealth.
2. Assume we have an arbitrary total equity of $10,000
3. Assume in diversification we split $10,000 into 5 equal $2,000 portions.
4. We are all comparing the gains in a same period of time for all coins in our portfolio.

As we always need a baseline for comparison, we will use the non diversification scenario1 as the baseline.
Scenario 1: Put all money in one successful coin (such as Bitcoin).
A: Incredible Gains scenario: 100% (anyone who bought BTC at $7000 in Oct 2017, date of this post $16,000 Dec 2017, >120%)
B: Good Gains scenario: 40% (just for argument sake if things quiet down a little)
C: Poor Gains Scenario: 10% (on a bad month, but let's not go negative just yet)
D: Negative Gains Scenario: -20% (such as when china banned crypto in banks).
Profit A: $10,000
Profit B: $4,000
Profit C: $1,000
Profit D: -$2000

Now we draw up a few diversification scenarios to compare against each of the non diversification scenarios.
Scenario 2: Diversify and we hit 1x jackpot and no losses. Remember, each coin has $2,000 intially
Coin 1: 100% gain on $2,000= $2000 (Assume this is bitcoin and it does a 100% gain)
Coin 2: 10% gain on $2,000= $200
Coin 3: 100% gain on $2,000= $2000 (100% gain in a period is $8,000,000 compounded 12 periods. Not a small gain to sustain)
Coin 4: 20% gain on $2,000= $400
Coin 5: 30% gain on $2,000= $600
Total profit: $5200
Comment: It appears that despite one large growth, the total matches profit in "Scenario 1: Profit B" in the baseline case. And there are no losses either. That is despite both bitcoin and another coin doubled.

Scenario 3: Lets assume we nit 3 jackpots and no losses. Remember, each coin has $2000 initially.
Coin 1: 120% gain on $2,000= $2400 (Assume this is bitcoin and it performed even better than the baseline "scenario 1: Profit A"
Coin 2: 30% gain on $2,000= $600
Coin 3: 100% gain on $2,000= $2000 (100% gain in a period is $8,000,000 compounded 12 periods. Not a small gain to sustain)
Coin 4: 20% gain on $2,000= $400
Coin 5: 150% gain on $2,000= $3000
Total profit: $8400
Comment: I had to check my calculation. Having 3 coins more than double in value, we overcome "Scenario 1: Profit B" easily. But Despite having 3 coins that doubled in value, it did not overcome "Scenario 1: Profit A" when that one coin doubled in value.

Scenario 4: Let's find out, what will it take to get to a balanced gain to "Scenario 1: Profit A".
Coin 1: 100% gain on $2,000= $2000 (This can be bitcoin)
Coin 2: 100% gain on $2,000= $2000
Coin 3: 100% gain on $2,000= $2000
Coin 4: 100% gain on $2,000= $2000
Coin 5: 100% gain on $2,000= $2000
Total profit: $10,000
Comment: Simple math, but good to visually represent. If every coin doubles and performs the same as the coin in "Scenario 1: Profit A" the two methods will reap the same profit. Wow... there is no margin for weak gains and it only just match the gains in "Scenario 1: Profit A".

Scenario 4: What does it take to beat the profit in "Scenario 1: Profit A".
Coin 1: 120% gain on $2,000= $2400 (This can be bitcoin)
Coin 2: 130% gain on $2,000= $2600
Coin 3: 140% gain on $2,000= $2800
Coin 4: 110% gain on $2,000= $2200
Coin 5: 120% gain on $2,000= $2400
Total profit: $12,00
Comment: By now, we get the idea that in order to beat "Scenario 1: Profit A" We need each coin's gain to carry its own weight and exceed it. If a coin does do more than double, there needs to be another coin making it up for the lagging coin. The probability of this in a short time is actually not easy.

So what is the verdict here. In a real world situation, there is probably no such thing as an always winning coin. However, such a coin actually exist now, at least for the time being.
That leads to the strategy:
1. As long as Bitcoin is dominant, the probability of diversification winning bitcoin in profit is very low.
2. if Bitcoin is no longer growing as fast, then look into diversification
3. if Bitcoin is becoming too volatile where it dips for days or months, then look into diversification
4. if Bitcoin doesn't look safe... all the coins will be affected adversely too, so draw out the cash :)

So, what do you think and which strategy works for you?



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Ultimatebtc
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Re: To Diversify or not to Diversify, lets compare.

Postby Ultimatebtc » Sun Dec 10, 2017 8:44 am

I still believe in scenario 4. I personally feel that bitcoin is bloated and it will be the cause of our next global economic downturn.
Buy in fear. Sell in Greed.

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wyukig
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Re: To Diversify or not to Diversify, lets compare.

Postby wyukig » Sun Dec 10, 2017 9:03 am

I believe all the scenarios are possible, depending on the time period. I'll explain my idea.

I first came across the idea of lost opportunity cost from Crypto Bobby's Youtube episode.
https://www.youtube.com/watch?v=NuPQSbHQpVs

>>>>>
Please note, depending on your strategy. If you're investing or trading, the strategy may differ.
If you're holding for long term, this should not matter.
If you're trying to maximise profit, this may offer some suggestions.
>>>>>

People are realising that there are oppotunity costs incurred while not holding bitcoin in the past 6 months.
What this means is that, it did not always used to be like that. And this behavior may also become reversed.
In other words, it appears to have went from Scenario 4 being the market trend to Scenario 2 or 3 being the market trend in the past 3-6 months.

There will be scenarios not listed above, please do mention if you can think of any.
The benefit of listing the scenarios is that it could help us understand how to react to maximise our profit.

Although the idea is not to be overly reactive over a short period of time, no market stays the same and no strategy works forever.
It will help a lot if we can find a model and work on a plan to tackle the situation.


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