Dollar Cost Averaging Bitcoin

Bitcoin dollar cost averaging consists in investing a fixed amount of USD, into BTC, on regular time intervals. You’ll often see it referenced by its abbreviation of "DCA".

Purchasing $10 every week, for example, would be dollar cost averaging.

This strategy is mostly used by investors that are looking to purchase Bitcoin for the long-term, since it protects them from potentially allocating all their capital at a price peak.

Investing in Bitcoin with no DCA (Example)

It’s January 1st, 2018, and John decides to purchase $5,000 worth of Bitcoin today.

The Bitcoin price at the time was $13,800 per coin, which means that John now owns 0.362 BTC.

Investing in Bitcoin using DCA (Example)

It’s January 1st, 2018, and Alice decides she wants to purchase $5,000 worth of Bitcoin.

However, instead of investing the entire amount today, she decides to purchase $500 every month, for 10 months.

10 months later, Alice owns 0.61 BTC. That’s allmost twice as much as John, even though both invested the same amount.

Advanced Bitcoin DCA Strategy

If you have some experience trading, you’ll quickly realize that you can improve the performance of your dollar cost averaging strategy by making use of some simple tools.

When going this route, you would purchase Bitcoin whenever a set of simple technical analysis tools give you a signal, instead of a fixed time interval.

Some examples of signals that traders can use for better timing entries include buying when Bitcoin approaches a high time frame moving average (like the 200 DMA), looking for unusually oversold conditions (RSI or MACD), or using a valuation tool like the stock to flow model.

Dollar cost averaging is a powerful strategy for investors looking to get long-term exposure to Bitcoin. However, just like any strategy, it has its pros and cons.

This guide outlines the pros and cons of dollar cost averaging into Bitcoin to give a balanced overview.

Pros of dollar cost averaging Bitcoin

1) Reduces the risk of buying tops

Dollar cost averaging is based on the concept of splitting the desired investment amount into several smaller purchases made on a regular basis.

Hence, since you are not allocating all your capital on the same day, it is impossible to invest all your money at the top.

This is key for an asset class like Bitcoin, which can drop -50% from highs in a matter of weeks, as was the case in January 2018.

2) Doesn’t require big up-front investment

Since DCA strategies are constructed around making small, yet regular, purchases, you won’t have to commit a massive amount of capital from day one.

This is an especially important benefit if you don’t feel comfortable with investing your savings into Bitcoin, and instead take a small chunk from your paycheck every month.

3) Gives you time to understand Bitcoin

Everyone that held Bitcoin for more than 3 years, is in profit on their initial purchase. However, many people capitulate just shortly after making their purchase.

These investors often do so because they did not take the time to properly understand Bitcoin, and react emotionally after a sharp BTC price decline.

In order to avoid making the same mistake, it is crucial that you understand the value proposition of Bitcoin and that it should NOT be seen as a "get rich quick scheme".

A Bitcoin DCA strategy helps with this by giving you some time to properly research BTC, before your entire investment is allocated.

The result of this is that while you still know little about Bitcoin, your allocated investment will also still be relatively small. Yet as you continue to learn more about Bitcoin, your periodic purchases also kick in.

Hence, your invested amount in Bitcoin grows together with your knowledge about the currency.

4) Opportunity to buy BTC at steep discount

This benefit is somewhat related to the first point we outline.

By not allocating all your capital at once, you will have some cash left to step in if Bitcoin were to suddenly crash, allowing you to scoop up some very cheap coins.

A great example is the November 2018 Bitcoin price crash. BTC was trading for months in the $6k per coin range, until it suddenly collapsed to $3.5k.

Buyers that had dry powder left, could use that as an opportunity to dollar cost average.

Needless to say, shortly after the crash, Bitcoin started a parabolic rally that would bring it to $14k per coin in just 3 months.

5) Reduces emotional stress

A highly underrated point in every investment strategy is the toll it takes on your mental health. This is especially true in the wild Bitcoin markets, where price swings that would be considered apocalyptic in the stock market, are part of the norm.

By dollar cost averaging, you won’t have the shock of investing a large sum of money and having to constantly worry about price swings.

Instead, your investment amount will slowly increase as you get more comfortable with Bitcoin’s inherent volatility.

Cons of dollar cost averaging Bitcoin

1) Eliminates possibility of buying exact bottoms

While dollar cost averaging prevents you from allocating all your capital at the exact top, unfortunately it does the same for the bottom.

If you follow a dollar cost averaging strategy, it is impossible to allocate all your funds at the exact bottom in Bitcoin. Some purchases will have always be made at a higher price, if the strategy was executed properly.

2) Takes time to get desired exposure

The very core of a DCA strategy, regular small purchases, mean that it will take some time to get your desired exposure.

Depending on how you structure your dollar cost averaging, this usually means anywhere between 3 and 12 months.

3) Potentially lower performance in strong bull market

If Bitcoin is in a strong bull market, certainly the best move would be to make the entire purchase at once, since the next time you would dollar cost average, price is likely higher.

This is a major downside of the DCA approach.

However, on the other hand, how do you know for sure if Bitcoin is in a bull cycle? What if price just showed some strength, and retraces the entire rally by the end of the month?