S1 P4: Why Bitcoin Keeps Going Up

[This is post #4 of Season 1. You can read last week's post here.]

Why is Bitcoin going up so much?

A lot of people will give you a lot of reasons, and a lot of them are hard to understand.

Last week I heard an explanation for the incredible performance, and it's the best one I've heard so far.

The reason Bitcoin is skyrocketing?

It's going up because it's been going up.

That's it.

It's rising because people see it's rising and don't want to miss out. As a result, price rises more. Then more people see it's rising and don't want to miss out. And price rises more.

It's human nature.

You know what else it is?

Trend following.

People are just following the trend on Bitcoin and some people will make a lot of money. (I hope those people also keep their money if Bitcoin ever falls.)

I suppose there are a lot of "fundamental" reasons why Bitcoin is such a mania. Some of them make sense (no government manipulation, a limited number of available bitcoins).

But guess what? No amount of good reasons will stop a meteoric fall if the trend decides to go the other way. The only thing that will matter is the trend.

Which, of course, is exactly my point.

Trend following is the best trading system of all time. It doesn't need a reason. It just is.

However, as you know, the experts shake their head at trading for wealth. Trading doesn't work and the only way to properly invest is to buy the whole market via Index Funds. Period.

So let's say we're a beginner and we have $10,000 to invest. And let's say it's 2008 (with Armageddon just around the corner).

If we listened to the experts and invested in an Index Fund back then, our $10,000 investment would have turned into $18,180 today. That's an annualized rate of +6.15% per year. Yes, we would have had to suffer through a 50% drawdown, but, hey, that's a small price to pay.

Not bad. We're officially "investors."

But what if we followed Bitcoin's lesson and just bought something that's going up?

For example, what if we decided to use the Turtle Rules that are public and available to everyone. If you don't know the rules of the Turtle System, here's a quick breakdown:

Buy something that's going up. Sound familiar?

That's it. You don't have to know anything about anything. Just buy when something goes up (when it breaks above the high of the previous month or so).

And if it stops going up and turns around? Then you sell it. Trade over. Now we can go look for something else that's going up.

That sounds ridiculous. You can't just buy something that's going up and sell it when it starts to go down. That will never work.


Going back to 2008, what was something we might have liked back then? How about Apple? The iPhone had just come out recently so we probably were fired up about the company.

Using the Turtle Rules on AAPL, our $10,000 in '08 would have turned into $32,267 now. That's double what the market returned in the same time (12.42% annualized return). And the worst losing period was 46%, which is less pain than the market produced.

Or what if we didn't feel confident about picking an individual stock? What if we heard that Forex is good for traders (as opposed to long-term investors) and has more leverage? That would give us a chance to get more out of our trades when things go up.

So what if we used the Turtle Rules again and just bought the USDJPY when it went up? In addition, someone told us that we can make money going Long on the USDJPY due to interest rates (like a dividend payment), so we won't even bother going Short. Too much work anyway.

If we bought the USDJPY when it went up, our $10,000 investment in 2008 would have turned into $25,375. That's an +8.86% annualized return for the same risk as being in an Index Fund.

And, of course, if we used these trading rules and somehow decided that Bitcoin was worth a try, we would have done nothing from 2008-2016 but we'd now be in a trade that's roughly $100,000 in profit.

Buying when something goes up works. Trend following works.

And tomorrow I'll go over some more examples of trend following trades that beat the market.


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