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.

Bitcoin Investing — All-in vs. Dollar Cost Averaging

Bitcoin Investing Investments
Purchase Dates All-in Earnings calculated from purchase date Dollar Cost Averaging Earnings calculated from purchase date
5/18/2017 $22,644 $83,580 $1,887 $0
6/18/2017 $29,304 $68,068 $2,664 $2,276
7/18/2017 $22,440 $66,080 $2,244 $4,530
8/18/2017 $38,844 $40,824 $4,316 $8,333
9/18/2017 $32,136 $38,680 $4,017 $12,102
10/18/2017 $39,165 $22,799 $5,595 $17,269
11/18/2017 $47,058 $6,054 $7,843 $24,485
12/18/2017 $94,800 -$50,540 $18,960 $41,585
1/18/2018 $44,564 -$9,156 $11,141 $52,148
2/18/2018 $33,276 -$6,720 $11,092 $62,783
3/18/2018 $15,724 $1,980 $7,862 $70,565
4/18/2018 $8,163 $689 $8,163 $78,635
$7,148.67 = AVG
April 22, 2018 $8,852

If you believe, as I do, that Bitcoin is here to stay and will be valued in the tens of thousands of dollars in the not too distant future, then the only problem is considering on how to invest.  There are two investment strategies that seem to be favorites of Bitcoin enthusiasts.  The first we’ll call, All-In, meaning just what it says.  Decide how much money you want to invest in Bitcoin and buy that much Bitcoin.  Period.  End of story.  Don’t hesitate.  Don’t wait for lower lows.  Don’t wait.  The second is called Dollar-Cost Averaging.  Decide on an amount that you can invest in Bitcoin on a regular interval and begin to accumulate. Let’s compare the two.

For comparison sake let’s say you invest with the All-in strategy twelve months worth of Bitcoin a year ago.  Bitcoin was selling for $1887 and you would have had to invest $22,644.  It would have earned you $83,580 today; a nice tidy sum.  Had you waited and gone all-in the following month, you would have had to invest $29,304 and it would have earned you $68068 today.  In fact, the longer you waited, the less you would earn.  By December your investments would be in the negative numbers only beginning to look better as an investment now.  Of course, you would have to wait for Bitcoin to reemerge above the $19500 mark before seeing profits.

If you had purchased a Bitcoin each month in a dollar-cost averaging strategy your earnings would have improved each month.  Looking backward, the earlier you started the better off you’d be today.  The strategy even weathered the precipitous fall from December’s highs.  Dollar cost averaging seems to be the better strategy in this case.

Timing is the most difficult aspect of investing.  To be able to predict when to buy and when to sell is almost impossible.  Dollar cost averaging mitigates the need to get your timing right especially with Bitcoin which is, thus far, a totally unknown phenomenon to the investing community.