The concept of Dollar cost averaging Bitcoin might sound pretty strange to a first time cryptocurrency investor. I know it did for me. FYI, those involved in the crypto space normally talk about DCA’ing into the project you want to invest in. Let’s take a closer look at dollar cost averaging, examples, the reasoning behind it and more.
What does it mean when you say that you are dollar cost averaging Bitcoin?
Although there are many variations of this method, it all comes down to averaging out the price you pay for Bitcoin or any other cryptocurrency over time.
What this does is it helps you fight the volatile cryptocurrency market and withstand market pumps and corrections.
Here’s an example of how to do it
Let’s say you set yourself a goal to buy 1 Bitcoin. At current market prices, it’s around $6300. You have the $6300 right now and you’re willing to buy 1 BTC right on the spot.
However, the day you were supposed to buy into the market, you got busy and didn’t go through with it. The next day you check the cryptocurrency market and see that something major has happened. There are signs of sell-offs and red signals all across the board.
Bitcoin has also fallen to $6000. Later that day it’s fallen to even lower, $5800. Although it does not always happen this way, I’ve seen my fair share of similar situations in this 2018 bear market. Needless to say, prices have been volatile.
You could have invested your $6300 on day one and the next day it would be worth $300 less. That’s a pretty crap feeling. I think any crypto investor can share your pain.
What you could have done is dollar cost average your BTC buys. Instead of putting in all your money at once, you could have decided to buy 0.1 BTC every week for the next 10 weeks.
You could have ended up buying 0.1 BTC at $6300, at $6000, $5800 etc – you get the point.
This video explains it in a great and simple way as well:
Pros and cons
DCA is great when you’ve messed up by buying at the highs, especially in this market where prices are super low. It’s also great to limit your risk if you are new to investing and not good at reading markets.
Let’s say you bought BTC at $20 000 in the January 2018 ATH and now you’re feeling a bit sad because the price is down.
If you truly believe in the success of the project, BTC in this case, you could keep on buying more BTC, but now at the current low price of $6300. This simple equation will put it into perspective:
0.1 BTC at $20 000 = $2000
0.1 BTC at $6300 = $630
$2000 + $630 = 0.2 BTC
Average price of BTC bought = $2630/0.2 = $13150
I know this is a very simple example, but as you can see, instead of sitting on your $20 000 BTC price hoping for the market to increase in order for you to break even, you can DCA. Now your average price of BTC bought is $13150.
Off course, there are times when the market is just so low that you shouldn’t be buying small amounts and instead buy large amounts of crypto. The catch is being able to discern and have the skills to do so.
Another cons is the fact that you need to keep buying. Let’s say for some reason you invested in a bad crypto project. This could be one that turned out to be an exit scam, or where the team constantly fails to meet targets or something else, what’s the point in buying more just to dollar cost average your buys?
I’m not a day trader and you should not take any advice I give you as financial advice. I’ll be the first to admit that there are tons of people out there who are much more skilled and experienced than me in this space. However, this article should be a good introduction to DCA.
Be sure to check out the reference section for more advanced content and tips.