Despite its lack of mainstream coverage and interest, Bitcoin just steamrolled the $10k barrier. This 2019 run-up may be characterized as a disbelief rally, with Bitcoin burgeoning from the bear market. Confident calls for lower price targets, from those waiting for a “cheaper” buy-in price, didn’t transpire as sub-$3k prices never materialized. These individuals will likely have to buy-in much higher than they intended, but would’ve been better served Dollar Cost Averaging (DCA), as opposed to timing such an unpredictable market.
What is Dollar Cost Averaging?
“Dollar-Cost Averaging is a strategy that allows an investor to buy the same dollar amount of an investment on regular intervals. The purchases occur regardless of the asset’s price.” — Investopedia
With dollar cost averaging, you can define how regularly you’d like to buy Bitcoin, generally using the same amount of money. For example, if you have $500 that you want to spend on Bitcoin, you can distribute that as five $100 purchases per week instead of making a lump-sum purchase — a lump-sum which can leave you overexposed, especially if you mistime the market.
You can also cater your dollar cost average to match a percentage of your weekly (daily, bi-weekly etc.) earnings. For instance, you could assign 1% of your paycheck to weekly purchases, as your dollar cost averaging strategy.
Returns of DCA into Bitcoin
Using dcabtc.com (created by John Cantrell), the table below was constructed. The values are based upon a $10 weekly purchase amount over varying years (1 to 7 years). There’s also a comparison of Bitcoin to Gold and the Dow Jones Industrial Average (DIJA):
I really like the dcabtc tool because it’s simple and it clearly depicts the immense impact that dollar cost averaging can have on a Bitcoin portfolio.
I decided to use $10 per week since it isn’t an exorbitant figure and it can be easily used to derive other valuations, for example:
- For $5 per week, divide the values in the table by 2
- For $100 per week, multiple the values in the table by 10
Also, for those new to Bitcoin, it would make sense to start with a smaller figure until they build a greater understanding of market dynamics. In this manner, dollar cost averaging serves as a mechanism to pace oneself.
What’s to like about DCA
Here are some highlights concerning the advantages of dollar cost averaging into Bitcoin:
- Prevents the over-exhaustion of larger and all-in positions
- Eliminates the stress of making the gamble to time the market
- Tempers your emotions so that urges of FOMO (fear of missing out), panic buying, and/or selling are minimized
- Gradually helps you build your portfolio, which will motivate you to maintain interest, especially in bear markets
- The impact of short-term volatility is smoothed, as historical performance shows the gains that can be realized over the long-term
- The majority of positive price action is typically contained within 10 days per year, so it ensures you’re invested during major moves to the upside
Long-term DCA Yields Positive Results
All in all, dollar cost averaging is an effective strategy that can be employed into Bitcoin, altcoins, and other markets. It’s not a get-rich quick tactic and requires discipline. For crypto, it can be leveraged as a useful tool in navigating extreme volatility, while providing sizable gains in the long-term.
Disclaimer: The content above is not intended to be investment advice.