Become a Bitcoin Pimp: Dollar Cost Averaging
Bitcoin has been on a tear since its sudden drop to $4000 in March 2020. The coin has clocked some serious gains and currently trades above the 50K mark, rounding out to a 1150% increase. For those who have been active in the markets it has potentially provided huge profits, but for those still on the sidelines waiting for the right moment to step in the only thing that has increased is the missed opportunity.
The thing about timing the market, looking at an asset that is trading at all-time-highs and waiting for the dip, is that there is no real way of telling when the dip will come or when it has passed. If BTC drops 12% in two days, does that mean it’s time to go all in or should you wait for further depreciation? Hindsight is the only way to be sure, and that’s how newcomers continue to miss opportunities as Major Tom inches closes to the moon – with huge volatile price movements in between.
For those that want to HODL Bitcoin yet don’t feel comfortable putting all their eggs in one price-point basket, risking buying the top and sitting on losses for an undefined period of time, there is a buying strategy that compromises between all-in and missing out: dollar-cost averaging.
How dollar-cost averaging works
Dollar-cost averaging, or DCA, means buying smaller amounts of an asset at specified intervals regardless of price movements. Of course, most people will at least try to time purchases in a way to take advantage of short-term market downturns, but the point is that this buying strategy reduces risking too much capital all at once.
With DCA, you first decide how much you are willing to invest, and then instead of investing the money as a lump sum you buy smaller equal amounts over a specific length of time. At times you will be buying Bitcoin when it’s trading at all-time-highs, and other times you are the one scooping up cheaper coins after a market sell-off. Over a long period, however, the average price at which you bought all the BTC in your wallet will even out between the top and bottom.
The pros and cons of DCA
DCA typically works out in your favor enabling you to buy low and sell high, but there are downsides of course. During extreme bull markets, say the last 4 months of BTC trading, you might be better off investing all your capital at once rather than averaging out the price over time. But again, this knowledge only comes in hindsight. There is no way you, or any self-professed technical analysis Guru, could know that in advance.
The real aim of DCA is simply to reduce risk. Depending on how the market plays out as you make scheduled purchases, DCA either causes you to miss out on profits or it pays off as you prevented yourself from buying the top and sitting on losses for an extended period. The real benefit is perhaps ease of mind by lowering the emotional intensity of putting all your money at stake at a single price point.
With lower risk comes lower reward, but if you are a long-term Bitcoin bull and are just looking for a way to ease into HODLing BTC, then a dollar-cost averaging strategy is worth considering as you buy your first Bitcoin.
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