Bitcoin is a highly volatile financial instrument. To play with this volatility, investors have come up with various techniques of investing money into Bitcoin for maximum profits. One of the best investment technique is Bitcoin Dollar Cost Averaging.
What is Bitcoin Dollar Cost Averaging?
Using this method, investors buy a little bit of Bitcoin over a long period. Sometimes, they may buy when the Bitcoin price is low, and sometimes when it is high. You need to develop expertise to answer if buying bitcoin is worth today or not. So, considering this, a new parameter known as ‘average’ comes into the picture. That is, you are spending an average amount of dollars to buy the Bitcoin. This average is usually in sync with the price of Bitcoin over some time.
Investors use the dollar-cost averaging crypto strategy of Bitcoin when they predict that a financial instrument has long-term growth. Even now, this is an effective strategy for some stocks, and more recently, for Bitcoin and other cryptocurrencies.
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Time in the Market Beats Timing The Market
It’s hard to predict markets that have extreme volatility like the Bitcoin’s. But at the same time, fearing and retreating from the market will make you miss much of the potential growth. So, investors spend time in the Bitcoin market by breaking down their total investment budget into smaller portions and spread it over time. So, even if they buy at the wrong time once, they may not be able to bear much loss. And overall, they will benefit if the financial instrument has net growth, like Bitcoin’s. The value of Bitcoin touched a record 30,000+ dollars towards the last week of 2020.
How to Dollar-Cost Average Bitcoin?
The one thing you need to do DCA is platforms that offer recurring payments. Well, there are some like Coinbase and Blockchain.info. On these platforms, you can set how much Bitcoin you want to buy over a set period. Then, the platform will automatically deduct the funds from your linked bank account. So, DCA happens here in a more automated way.
Here is an example of how to DCA with one set of popular applications in the market.
First, download a dollar-cost averaging bitcoin app called Betterment. This application allows you to steadily invest in a financial instrument by deducing funds from your checking account. You can even set a checking account with Betterment or use your bank account for the funds. Apart from planning your savings and retirement plans, Betterment also helps with Bitcoin investment.
Set up an Investment account with Betterment. Put in the goal amount you want to invest by a particular year. You can either spend the funds according to Betterment folio or Auto-adjust based on stock performances. Once you make this account, the app will deduct amounts every month from your checking account to meet the goal.
Now, Betterment does not directly deal with cryptocurrencies. To ensure this, you need to install a Coinbase app and set up an account there. You then link the Coinbase account to deduct money repeatedly from the Betterment account. For example, if you have $1000 in your Betterment account from the stock portfolio, you can choose 10% ($100) to invest in Coinbase. This 10% is up to you to select lower percentages.
Through Coinbase, you can further divide the funds into either one cryptocurrency or multiple ones. And this process of investment continues at regular intervals that you set.
Overall, the goal is to ensure that your investment rides on the high volatility over the long term and gives you the result. Betterment and Coinbase together endeavor to ensure that.
Is Bitcoin Dollar Cost Averaging A Good Idea?
Yes, it is a good idea if you want to save money in the long run while investing in extremely volatile stuff.
Let’s understand this with a case study. Consider an investor who is investing in Bitcoin. He invests $100 on the 17th of every month, starting from when Bitcoin peaked for the first time in December 2017. From then until December 2020, the investor would own 0.48 BTC having paid an average cost of $8660. Currently, when the market price is close to $18,000 per Bitcoin, the investor will make a gain of almost 120%.
However, if the investor put all his savings on December 17, 2017, when Bitcoin peaked high, by now (December 2020), the investor would face a net loss of 4.7%. If you adjust this loss for inflation over the 38 months, the significance of it will be higher.
Pros and Cons of Bitcoin Dollar Cost Averaging
Every strategy has its advantages and disadvantages. Likewise, Bitcoin dollar-cost averaging cryptocurrency also has:
Advantages of Bitcoin Dollar Cost Averaging
There are a few notable advantages of Dollar Cost Averaging in Bitcoin
There is Less Emotional Component in Your Investments
DCA is a very mechanical form of investment where you just invest a set amount at regular intervals of time without taking into consideration (except in exceptional cases) how the market is performing at that point. You will not influence your decision, therefore, on how wildly the cryptocurrency fluctuates in price. You will thus, knowingly or unknowingly make use of opportunities by buying Bitcoin when the prices are low.
Takes the Bad Timing Element Out of Your Investments
If you invest more money at a particular time on a financial instrument, you stand the chance of that being the bad timing. That is, the price of the financial instrument can fall from there, or even if it grows, may not yield you generous profits. DCA takes that risk out of the equation. You invest at regular intervals regardless of whether it is the right time or the wrong time.
Disadvantages of Bitcoin Dollar Cost Averaging
There are some disadvantages of Bitcoin Dollar Cost Averaging that are explained below
Growth of the Market is High Over Time
If any financial instrument grows over time, especially if the growth is severe, DCA can limit the profits you can make out of it. For instance, you invested in Bitcoin say in around 2010, at a lump sum, by now, you would have the coin valued at close to $30,000 per coin! Since the market has a rising tendency in the long term, lump-sum investment early on provides better results and profits.
You Still Need to Do Your Research for Good Investments
The DCA is not a one-stop solution to avoid investment risks. Though the approach is passive, you need to do your research to identify worthwhile financial instruments. For instance, selecting the right cryptocurrency and period range to spread your investments in. If you pick the wrong place to invest in, you will steadily be losing money in the long term. Also, if you undertake DCA, you stay immune to the changing environment of the investment. That is, there is less scope for you to adapt your approach of investment from the new information you obtain with the financial instrument. As always, DYOR!
Is it Better to Dollar-Cost-Average Bitcoin or Invest Lump Sum?
Several studies compare when lump sum investment is better than DCA and vice versa.
Dollar-cost averaging into Bitcoin reduces the impact of wild swings of cryptocurrencies during a global event. But beyond that, you still stand to lose some money when the market crashes. Through DCA you miss out on the opportunity to hold extra cash that you can invest later at a lump sum when there is a crunch situation. So, you can miss out on dividends and income throughout this period.
Vanguard compared the two strategies through statistic dollar-cost averaging bitcoin charts taken from a small sample space. If you consider 6 months, LC fares better than DCA by 64% assuming the portfolio divides into 60% stocks and 40% bonds. Over 36 months, the performance of LC was even better, performing by 92%.
Although you might argue that the case might be different in the case of cryptocurrencies. But the essence of what is beneficial in one strategy and what not remains the same no matter the financial instrument you invest in.
Investors say it is always better to invest your money right now adjusting for the risk, instead of laying off the capital for a period. While this might work in some cases but not generally. DCA is better in a falling market though but the flip side is, there is less interest in falling markets!
If you feel a lump sum is too risky, maybe your portfolio needs to change. Try to choose a more conservative one, which will give you more savings than losses. At least, more chances of savings. Sticking to DCA is easier said than done because it is not possible always to let go of emotions while investing. But understand the style of investment you prefer, and choose the right one.
How Often Should You Do Bitcoin Dollar-Cost Averaging?
Well, there is no defined frequency rule to do Bitcoin dollar-cost averaging. People do it monthly, while some even do it weekly, although the former is common out of the two. To simplify your DCA decisions, you can use online tools that let you calculate how much you stand to earn through this strategy according to a set frequency of repeated purchases.
One dollar-cost averaging bitcoin tool is Dcabtc.com. The crypto dollar-cost averaging calculator provides you options to choose your parameters for DCA, and models it with historical data for predictions. In this dollar-cost averaging into Bitcoin calculator, you can select the amount you want to invest, the frequency of the purchase, the total DCA period, and the duration when it starts. It then gives you the total invested amount, the total value, and the percentage change.
For instance, people who invested through DCA in the last three years, investing $10 a week heaped a profit of close to 120% after three years. This might not be as high as the mad gains some people reported during this time, but it keeps your money safe as well, even during the hard times.
One way you can tweak Bitcoin dollar-cost averaging to make it more efficient for you. Like, invest when there is a technical signal instead of through fixed periods.
You can use the above tool to compare the performance of Bitcoin using DCA to other financial instruments like Gold and other assets using the same strategy. Over many periods, Bitcoin provides a higher return on investment.
A little bit of determination of what frequency works out best for you also comes from experimentation. You can divide your investment sum into two sets of smaller portions and invest them in different frequencies. Take a stretch and see which one works better. DCA reduces the risk of high volatility in markets, and the specifics of it are up to the investor.
Why Bitcoin DCA Beats Buy the Dip Strategy?
First, let’s define what is buying the dip. You save a large amount of money and invest in the market when it is in a dip. A dip is when the market is trending towards lower prices, and it is not at an all-time high. But the tricky part comes right here: You will never know the dip until you compare it with the previous dips through a period. So, the hindsight bias is maximum in this strategy.
Experts have run simulations where they have assumed the best (and impossible) case of the investor knowing that the dip they have chosen is the lowest possible or not. Even with this advantage, studies have shown that DCA beats Buy the Dip for over 70% of the time. But how does this happen?
Practically if you see, buying the dip works when there is a severe decline, and you have to perfectly time it. If you consider the US Market history, for example, there have not been many dips, so the potential of the strategy working is less. Studies have also shown that if you miss the timing of dip-buying by even two months, the returns diminish.
Yes, you can argue that Bitcoin sees many dips, but the market moves towards a steadier and more positive growth over the recent months. It is better to invest in keeping in the market trend and predict how it will fare out in the future.
Making Bitcoin Hoarding Great Again
Bitcoin has changed the financial scenes entirely. Investors have always smirked at the word ‘hoarding’ when linked to financial instruments, but it might not always be the case in Bitcoin. Governments around the world have been imposing anti-currency reforms to avoid hoarding of currency. But there is no governmental or political regulation governing Bitcoin, so there is absolutely no reason to not hoard Bitcoin.
Consider Bitcoin like a piggy bank, the more money you put at the right times (sensibly, of course!), you will get exponential results. It is open and accessible by any human being on the planet. Also, the more people trust Bitcoin, the more stable the volatile cryptocurrency will become for sure. DCA is one way to hoard money in Bitcoin logically. Use it and multiply your returns by many folds!
Frequently Asked Questions
If you are a beginner to this strategy of investing in cryptocurrencies, here are some common questions and answers for them:
How to Dollar-Cost Average Bitcoin On Coinbase?
Coinbase rolled out functionalities that allow crypto dollar-cost averaging in Bitcoin. Through this, you can invest a set amount weekly through the platform. Set up your Coinbase account, link it to a Bitcoin wallet and at set periods, the exchange will draw money from the wallet for investment purposes.
Why DCA Bitcoin Is The Next Big Thing?
Bitcoin is scarce, at least it will become scarce as more investments come to the foray. Therefore, DCA can ensure that you spend hoard more Bitcoins in the long run and take advantage of the increasing value of the cryptocurrency asset. Also, you can eliminate the high volatility of Bitcoin that stops some investors from investing in it.
Does Bitcoin Dollar Cost Averaging Increase Return?
Yes, over time Bitcoin dollar-cost averaging does increase returns but it could be limited if the market is trending towards increasing positivity. All in all, the choice of which strategy to use depends on how much risk you are willing to undertake in Bitcoin investing. Lump-Sum at the right time provides more returns than DCA but is riskier.
Takeaway – Bitcoin Dollar Cost Averaging
Bitcoin DCA is the present and the future. More exchanges and platforms are rolling out this feature because of the increasing interest. Especially during the pandemic when investors are more than cautious to spend money, DCA works best without stopping your flow of investing money on Bitcoin. Having said that, if you want more profit you might consider a lump sum investment. The strategy you choose depends on how much risk you want to undertake. Like any investment class, the same rule applies in cryptocurrency dollar-cost averaging: Less risk means less potential returns.
Whales move large amount of Bitcoin for a few bucks after employing the Bitcoin DCA technique at the lows of the market to create fear and accumulate more for themselves. So, guard yourself away from emotional investing and be more rational and look for long term gains. To lock in lock term gains, you need to know when exactly to sell Bitcoin, so you are dollar cost averaging and buying low and selling BTC at highs.
I am a data analyst by profession who loves to crunch numbers at daytime and come home wondering how my passive income numbers for the day look like. I believe in being rich rather than looking rich. Follow me for Cryptocurrency, FIRE, Personal Finance, Credit Cards and Digital Nomad updates