Bitcoin: Case for Dollar Cost Averaging

Dollar cost averaging is a strategy in which the same dollar amount of Bitcoin is purchased on a regular basis, $10,000 per month, for example.  Another similar strategy would be to purchase a fixed amount of Bitcoin on a regular basis, say, one Bitcoin per month.

To the bottom and back in the wink of an eye.  Bitcoin hodlers are all saying the same thing. “Bitcoin can still go lower, but when it finally does reach bottom, it will come roaring back so fast that if you blink you’ll miss it.” Most are describing the bottom, not by a monetary amount but rather by an emotional attitude.  “You will know Bitcoin has reached the bottom when you, the longtime bitcoin believer, feel it isn’t happening, and it may never happen.”  When you doubt your own long-held belief that Bitcoin ultimately rules, feeling that your holdings might indeed be worthless or are moving towards a zero value, then the bottom is nearby.

Do you have enough objectivity?  Do you know yourself well enough? Most investors, even seasoned professionals, aren’t objective enough to have those kinds of insights, and for a good reason.  It is counterintuitive to objectify and distance yourself from your feelings to better understand the marketplace.  Professionals prefer to work in quantifiable, predictive ways such as dollar cost averaging.  In that way, they can leave the emotional component out of the equation.   The problem is that it is precisely the ’emotional component’ we seek to understand, to recognize and to react to when it occurs as we expect it will.

Dollar Cost Averaging makes sense.  Let’s say you have been purchasing Bitcoin every time you see it going lower than you thought  possible saying to yourself “This looks like a good buying opportunity.”  You would have purchased at $14,000, $12,000, $10,000, $8,000 and $6,000.  Your average purchase would have been $10,000.  Now, compare that with absolute buying brilliance, buying Bitcoin at the bottom.  For argument sake, let’s say bottom turns out to be $6,000.  You buy an equal amount of Bitcoin, and you pay an average of $6,000.  If Bitcoin ultimately goes to $20,000 than your dollar cost averaging will net you $10,000 per Bitcoin or $50,000 while buying at the bottom will net you $14,000 per Bitcoin or $70,000.  You would have earned an extra 29%.  That’s nothing to sneeze at.  But look what you risk by trying to catch the bottom.  Let’s say Bitcoin reaches $6000 and then quickly bounces back up to $9000.  You then have to decide, was that it?  Was that the big one?  Do you go all in at this moment or was this just a blip and we’re still going back down? If you hesitate and you are wrong, then Bitcoin could suddenly see $11,000 or higher and then you’ve missed out altogether.

Strategy 1: Dollar Cost Averaging Strategy 2: Buy Bitcoin at bottom
Bitcoin Price Bitcoin Price
Purchase 1 $14,000 $6,000
Purchase 2 $12,000 $6,000
Purchase 3 $10,000 $6,000
Purchase 4 $8,000 $6,000
Purchase 5 $6,000 $6,000
Subtotal $50,000 $30,000
Average $10,000 $6,000
Profit w/Bitcoin at $20,000 $50,000 $70,000
Profit w/Bitcoin at $50,000 $200,000 $220,000

If you expect Bitcoin to ultimately go back up to December values than the difference between strategy 1 and 2 would be 29%, not a negligible sum.  But if you expect Bitcoin to ultimately go up to $50,000 than the difference between strategies 1 and 2 would be $200,000 vs. $220,000.  In other words, it wouldn’t make a whole lot of difference.  Conclusion: Dollar cost averaging is the way to go here.

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