Despite the lack of mainstream coverage and interest, Bitcoin has again broken the $10k barrier. This run-up in 2019 can be characterized as an incredible rally with Bitcoin emerging from the bear market. Predictions for a "cheaper" buy-in price did not come true as prices below $3k were never met. These people probably have to buy in much more expensively than they intended, but would be better off with Dollar Cost Averaging (DCA), in such an unpredictable market.
Table of contents
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Did you know that if you bought just $1 of Bitcoin every day for the last 9 years you would have turned ~$3,285 into over $18M by accumulating 2189 BTC? Just launched a tool to explore how DCA strategies would have performed using historic btc prices! https://t.co/DohCQ7C9S8
- John Cantrell (@JohnCantrell97) June 14, 2019
What is Dollar cost averaging
"Dollar Cost Averaging is a strategy by which an investor purchases the same dollar amount of an asset at regular intervals. The purchases occur regardless of the price of the asset. " - Investopedia
Dollar Cost Averaging allows you to define how often you want to buy Bitcoin, usually by the same amount. For example, if you have $500 you want to spend on Bitcoin, you can divide that as five $100 purchases per week instead of making a lump sum purchase - after all, if you buy all at once at the wrong time you'll have a bad exchange rate.
You can also adjust Dollar Cost Averaging to a percentage of your weekly (daily, bi-weekly, etc.) income. For example, you can allocate 1% of your salary to weekly purchases, as a strategy for calculating Dollar Cost Averaging.
Profits from DCA to Bitcoin
Using dcabtc.com (created by John Cantrell), the table below was created. The values are based on a weekly purchase amount of $10 over several years (1 to 7 years). There is also a comparison between Bitcoin and Gold and the Dow Jones Industrial Average (DIJA):
The dcabtc tool is very useful because it is simple and it reflects the huge impact that the cost of the dollar can have on a Bitcoin portfolio.
I decided to use $10 per week because it is not an exorbitant figure and it can easily be used to derive other valuations, for example:
- For $5 per week, divide the values in the table by 2
- For $100 per week, multiple values in the table by 10
Even for those new to Bitcoin, it is wise to start with a smaller figure until they have built a better understanding of the market dynamics. In this way, costing acts as a mechanism to temper itself.
What is the benefit of DCA
2/ Reminder that BTC generally generates all of its performance within 10D of any year.
- Thomas Lee (@fundstrat) April 2, 2019
-ex the top 10 days, BTC is down 25% annually since 2013 pic.twitter.com/zoEocEEZvu
Here are some highlights regarding the benefits of the average cost of the dollar in Bitcoin:
- Prevents the over-utilization of larger and all in positions
- Eliminates the stress of making the gamble to time the market
- Ease your emotions so that FOMO fears (fear of missing out), panic buying and/or selling are minimized
- Gradually, it will help you build your portfolio, which will motivate you to maintain interest (especially in bear markets)
- Smoothing the impact of short-term volatility as historical performance shows the gains that can be realized over the long term
- It ensures that you have already taken a position the moment the extreme rising begins
Long-term DCA yields positive results
All in all, Dollar Cost Averaging is an effective strategy that can be applied to Bitcoin, Altcoins and other markets. It is not a get rich quick tactic and requires discipline. For crypto, it can be used as a useful tool in navigating extreme volatility while making significant profits in the long run.