The Power of Dollar Cost Averaging into Bitcoin

Jared
Jared
Jun 23 · 3 min read

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.

Historically, DCA will offer considerable gains given Bitcoin’s increase over the years (Source: https://coin.dance/stats)

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):

Source: dcabtc.com (as of 6/23/19 — Bitcoin price ~$10.7k)

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

A weekly $10 purchase into Bitcoin over the past 9 years is now worth $26.84 million (Source: dcabtc.com — 6/23/19)

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.

Predict

where the future is written

Jared

Written by

Jared

Here to share my thoughts & ideas concerning cryptocurrencies. Hoping to learn & digest meaningful content that will expand my knowledge and thought process.

Predict

Predict

where the future is written