Dollar Cost Averaging and How it Works with Bitcoin

The Problem

The huge potential for profit making in the cryptocurrency market often draws the attention of potential investors. However, the volatile nature of the market equally causes people to hesitate to make their first purchase. During uptrends, the uncertainty about the next direction of the price movement causes individuals to postpone their first purchase to the next bear market in order to get it at lower prices. The same individuals are often overwhelmed by the negative sentiments that characterize bear markets. Some potential investors never make their first purchase as a result.

Such individuals have legitimate concerns since there are real-world examples of individuals who went all in and purchased bitcoin at its peak in late 2017 and had to watch their investment lose up to 84% of its value in the 2018 bear market. Historically, holding through downtrends have proven profitable in the long run as bitcoin price has consistently recovered from downtrends. This notwithstanding, not every investor can stomach huge loses on their first purchase. This is where dollar cost averaging is useful.

Dollar Cost Averaging and How it Works with Bitcoin

Dollar Cost Averaging (DCA) is an investment strategy in which a fixed amount is invested in an asset at fixed intervals. This strategy is recommended for risk-averse investors because it allows them to invest amounts they are comfortable with at their own pace.

Potential bitcoin investors can use this strategy by spending a fixed amount of their fiat currency on buying bitcoin at a predetermined interval. For instance, an investor can decide to purchases $20 dollars worth of bitcoin on a weekly basis. Another may decide to make monthly purchases of bitcoin worth $80. The idea here to avoid risking a lump sum at once.

The strategy also leaves the individual less exposed to the bitcoin price volatility and can be employed in both bear and bull markets. In bear markets, it can be used by investors who are uncertain about the bottom and are concerned about catching a falling knife. On the other hand, investors can use the strategy to avoid going all in at the peak of a bull cycle.

In addition to reducing risk, DCA practitioners will be generally less nervous about their investments as compared to investors who put a large sum into the market at once. This is because the feeling of money going out is less when small amounts are spent periodically. In a nutshell, DCA makes it easier for investors to enter the bitcoin market confidently and with less risk.

 

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