Many people who start investing in Bitcoin put down a chunk of money they're willing to lose and hope for the best. However, Bitcoin, like a lot of other cryptocurrencies, can experience daily fluctuations. As with any type of investment, these fluctuations can cause uncertainty, fear of missing out, and even the fear of participating. When prices fluctuate so much, how are you supposed to know when to buy?
You'd buy your Bitcoin low and sell it high in an ideal world. But, in reality, even experts find this easier said than done. This is where the dollar-cost averaging strategy comes in. Instead of putting down a huge chunk of money and trying to time the market, dollar-cost averaging allows you to reduce the impact of market volatility by investing smaller amounts on a regular schedule.
This strategy has been used for decades for other investments like gold or stocks, and now, people are using it as a strategy to successfully invest in cryptocurrencies like Bitcoin. Dollar-cost averaging is a solid strategy for those who believe their assets will appreciate long-term and experience some price fluctuations along the way.
What is Dollar Cost Averaging?
Dollar-cost averaging (DCA) is a long-term investment strategy that involves investing a fixed amount of money into the same asset (in this case, Bitcoin) at regular intervals over a long period of time. For example, let's say you have $1,200 to invest in Bitcoin. Instead of investing that money all at once, you could put $100 toward Bitcoin every month for a year.
How much and how frequently you invest depends on your goals and how much money you have to spare. It is common to invest on a weekly, fortnightly or monthly basis. Many people find that DCA is an excellent way to invest in Bitcoin without timing the market. It also protects you from accidentally investing a considerable sum of money when the price is high. DCA can also help investors safely enter a market while benefiting from long-term appreciation. And, it helps you average out the risk of any short-term downward price movements in Bitcoin.
One of the most significant benefits of dollar-cost averaging is that it helps you avoid emotional trading, taking a rules-based approach to investing. Often, beginning investors fall into the trap of emotional trading, where their buying and selling decisions are based on fear or excitement. This can lead to overbuying due to fear of missing out or panic selling during a downturn.
Bitcoin Investing Strategy
Of course, like any other investment strategy, the success of a dollar-cost averaging strategy is subject to what's happening in the market. If you had been one of the lucky ones who purchased Bitcoin ten years ago, you'd see significant investment returns today. At the beginning of May 2011, Bitcoin was trading for about $3.50. So if you would've invested $1,000 into Bitcoin at the time, the worth would be approximately $12 million today, as Bitcoin is currently trading at a little over $42,000.
However, it's important to understand that Bitcoin's dominance has been unprecedented, and while it did take off, there was no way to know for sure it would reach the heights it has today. Very few people knew about Bitcoin at the time, and that hypothetical $1,000 could have just as easily plummeted to nothing.
This is where dollar-cost averaging can be helpful, as you don't have to put all of your eggs in one basket. For example, if you used DCA ten years ago, you still would've seen major returns on your investment. And, putting money aside in increments would help you track the price fluctuations over time, so you'd be less tempted to pull out when there's a dip in the market.
Bitcoin Dollar Cost Averaging
To understand how much your Bitcoin would be worth using the dollar-cost averaging strategy, let’s look at a few examples.
Let’s say, for example, you put $10 into Bitcoin every week for the past nine years. Even if you’re not making a ton of money, most people can afford to spare $10 each week. Had you done this, you would have invested $4,700 and seen a return of $451,572, which is a return of 9,507%.
Now, let’s take it even further and say you put away $50 every month for the past nine years using the dollar-cost averaging strategy. In this case, you would have turned $5,400 into $536,397, seeing a 9,833% return on your investment.
Finally, let’s say you had gone with a $1,000 investment every two weeks for the past nine years. In this case, you would have turned a $23,500 investment into $2,227,500, seeing a return of 9,591%. The chart above helps to illustrate how your investments would trend over time.
Minimizing Bitcoin Volatility
Historically, using a DCA strategy has helped investors minimize the volatility of their Bitcoin investments.
For example, let’s say you invested $10 in Bitcoin every seven days beginning in 2013. This would’ve resulted in a $4,530 investment, and at the end of 2021, the value would’ve been $354,500. However, had you purchased Bitcoin in 2013 at its highest price in November, you’d only be seeing a return of $169,563.
If you had started making weekly $10 investments in 2017, you’d have invested $2,610, and you’d be seeing a return of $24,778. However, had you purchased Bitcoin for the same price in a lump sum at its highest price point that year, you’d only be seeing a return of $5,615.
If you had done this in the past year, making $10 investments each week, your $520 would be worth $554. This isn’t much of a profit but had you bought Bitcoin at its highest price in 2021, your $520 investment would drop to $346.
As you can see, dollar-cost averaging is a great way to minimize the impacts of Bitcoin’s volatility. By making small, incremental deposits, you can really see your investments grow without having to make a huge dent in your wallet all at once.
A good way to begin the dollar-cost averaging strategy is by signing up for an account with SMART VALOR, where you can buy Bitcoin and other digital assets and manage your crypto portfolio.