Some say the smartest way to start invest in Bitcoin or Ethereum is through consistent fixed amounts of US dollars 💵 into BTC or ETH on a regular time intervals over three to ten years (aka a long time).
Purchasing $10 every week, for example, would be dollar cost averaging. Coinbase and other digital asset wallets and exchanges allow you to do this with a few clicks; to pull funds from your bank account into your investment account on a regular basis.
This strategy is mostly used by investors that are looking to purchase Bitcoin for the long-term, since it protects them from potentially allocating all their capital at a price peak.
Don’t bust your load at the top; just nibble away by setting up your automatic purchase of Bitcoin or Ethereum and forgetting it for one to three years to ride a complete market cycle.
Investing in Bitcoin with no Dollar Cost Averaging – Example
It’s January 1st, 2018, and Ashton decides to purchase $5,000 worth of Bitcoin today.
The Bitcoin price at the time was $13,800 per coin, which means that John now owns 0.362 BTC, which is equal to $3,946.38 as today (September 28, 2020).
Investing in Bitcoin using Dollar Cost Averaging – Example
It’s January 1st, 2018, and Alice decides she wants to purchase $5,000 worth of Bitcoin.
However, instead of investing the entire amount today, she decides to purchase $500 every month, for 10 months.
10 months later, Alice owns 0.61 BTC, which is equal to $6,649.98 as today. That’s almost twice as much as Ashton, even though both invested the same amount.
Check out the investment tool dcabtc.com to see their interactive dollar cost averaging tool to see what investing the same amount of dollars into Bitcoin would be over a 6 month to 9 year timeline.
Here below I entered another example of dollar cost averaging, but this time with $100 a month starting 2 years ago in September 2018 that now equals $2,500 USD invested into Bitcoin with a current value of $3,844 representing a 54% increase.
Consider that you can earn an additional 4.5 – 6%+ APY on your Bitcoin or Ethereum by transferring your assets over to Blockfi or into DEFI. The extra return on top of the appreciation of the asset themselves is unique to digital assets and allows you to maximize your returns on your hodling of Bitcoin or Ethereum.
It’s such a simple strategy it often is overlooked or skipped by people like myself in the beginning because we think we can out smart the market and be a successful day trader.
Do yourself a favor and keep it simple. Setting up automatic deposits into your investment account and buying Bitcoin on a regular basis over a few years is a fantastic solution to diversification with the best chance of return for a nonprofessional investor.
If you’re interested in learning more about the Pros and Cons, see the highlights below from dcabtc.com
Pros and Cons of Dollar Cost Averaging Bitcoin
Dollar cost averaging is a powerful strategy for investors looking to get long-term exposure to Bitcoin.
Pros of dollar cost averaging Bitcoin
1) Reduces the risk of buying tops
Dollar cost averaging is based on the concept of splitting the desired investment amount into several smaller purchases made on a regular basis.
Hence, since you are not allocating all your capital on the same day, it is impossible to invest all your money at the top.
This is key for an asset class like Bitcoin, which can drop -50% from highs in a matter of weeks, as was the case in January 2018.
2) Doesn’t require big up-front investment
Since DCA strategies are constructed around making small, yet regular, purchases, you won’t have to commit a massive amount of capital from day one.
This is an especially important benefit if you don’t feel comfortable with investing your savings into Bitcoin, and instead take a small chunk from your paycheck every month.
3) Gives you time to understand Bitcoin
Everyone that held Bitcoin for more than 3 years, is in profit on their initial purchase. However, many people capitulate just shortly after making their purchase.
These investors often do so because they did not take the time to properly understand Bitcoin, and react emotionally after a sharp BTC price decline.
In order to avoid making the same mistake, it is crucial that you understand the value proposition of Bitcoin and that it should NOT be seen as a “get rich quick scheme”.
A Bitcoin DCA strategy helps with this by giving you some time to properly research BTC, before your entire investment is allocated.
The result of this is that while you still know little about Bitcoin, your allocated investment will also still be relatively small. Yet as you continue to learn more about Bitcoin, your periodic purchases also kick in. Hence, your invested amount in Bitcoin grows together with your knowledge about the currency.
4) Opportunity to buy BTC at steep discount
This benefit is somewhat related to the first point we outline.
By not allocating all your capital at once, you will have some cash left to step in if Bitcoin were to suddenly crash, allowing you to scoop up some very cheap coins.
A great example is the November 2018 Bitcoin price crash. BTC was trading for months in the $6k per coin range, until it suddenly collapsed to $3.5k.
Buyers that had dry powder left, could use that as an opportunity to dollar cost average.
Needless to say, shortly after the crash, Bitcoin started a parabolic rally that would bring it to $14k per coin in just 3 months.
5) Reduces emotional stress
A highly underrated point in every investment strategy is the toll it takes on your mental health. This is especially true in the wild Bitcoin markets, where price swings that would be considered apocalyptic in the stock market, are part of the norm.
By dollar cost averaging, you won’t have the shock of investing a large sum of money and having to constantly worry about price swings.
Instead, your investment amount will slowly increase as you get more comfortable with Bitcoin’s inherent volatility.
Cons of dollar cost averaging Bitcoin
1) Eliminates possibility of buying exact bottoms
While dollar cost averaging prevents you from allocating all your capital at the exact top, unfortunately it does the same for the bottom.
If you follow a dollar cost averaging strategy, it is impossible to allocate all your funds at the exact bottom in Bitcoin. Some purchases will have always be made at a higher price, if the strategy was executed properly.
2) Takes time to get desired exposure
The very core of a DCA strategy, regular small purchases, mean that it will take some time to get your desired exposure.
Depending on how you structure your dollar cost averaging, this usually means anywhere between 6 and 24 months.
3) Potentially lower performance in strong bull market
If Bitcoin is in a strong bull market, certainly the best move would be to make the entire purchase at once, since the next time you would dollar cost average, price is likely higher. This is a major downside of the DCA approach, yet for most how do you know for sure if Bitcoin is in a bull cycle? What if price just showed some strength, and retraces the entire rally by the end of the month?
Get started now with your plan to DCA into Bitcoin or Ethereum so that you can provide yourself with the best chances of optimal return with the least amount of stress and time.
Thanks for reading!