The market is complex — It does whatever it wants to do. It’s also mathematically unpredictable — and for that reason, wise people had invented the DCA method. Why? Because we are not magicians to know when to buy or sell, with certainty.
Dollar Cost Averaging (DCA) is a strategy where you divide a selected amount into equally-sized portions to purchase cryptocurrency at a regular time interval. This can be daily, once a week, once a month, or whatever you think is best.
We feel that it might be good to mention that DCA isn’t some “new kid on the block” — it is a well known and proven investment strategy. A perfect example of dollar cost averaging is its use in 401(k) plans, in which regular purchases are made regardless of the price of any given equity within the account.
The main advantage of using this method is that you are less worried about the volatility of most cryptocurrencies (stable coins excluded) and it is really effective for long-term investments.
Another advantage of this method is that it is very suitable for ongoing investment, such as investing a small portion of one’s salary every month (just like in 401(k) plans).
The great thing about Bitcoin is that, unlike stocks and equities, it can be bought for any amount of fiat currency. Every Bitcoin can be divided into 200,000,000 Satoshis (the smallest chunk of Bitcoin). There are enough satoshis (0.00000001 Bitcoin) for everyone.
Therefore, with Bitcoin (and most other Cryptocurrencies) you can invest any sum of money, without additional fees for splitting a stock.
In summary, the DCA investing method is perfectly suited for long-term Bitcoin investment. The belief is that Bitcoin will continue to rise over time since its supply is limited. However, nobody can tell for sure if now is a good time to buy, or if the price is too high. We can never know if we are at the peak or low of this year’s Bitcoin price. That is why dollar cost averaging is so effective.
Let’s look at an example of dollar cost averaging:
Peter and Claudia want to buy 1 BTC, but they use different investment strategies.
Peter wishes to buy Bitcoin in 500$ steps each week and Claudia wants to invest a lump sum — to simply buy 1 BTC with a single payment.
with DCA:
╔══════════════════╦═══════════════╦═════════════════╦════════════╗
║ DATE ║ BTC Purchased ║ Total BTC (sum) ║ Total Cost ║
╠══════════════════╬═══════════════╬═════════════════╬════════════╣
║ January 01, 2018 ║ 0.0373 ║ 0.0373 ║ $500 ║
║ January 08, 2018 ║ 0.0333 ║ 0.0706 ║ $1000 ║
║ January 15, 2018 ║ 0.0356 ║ 0.1062 ║ $1500 ║
║ ... ║ ... ║ ... ║ ... ║
║ April 23, 2018 ║ 0.0568 ║ 0.9015 ║ $8500 ║
║ April 30, 2018 ║ 0.0537 ║ 0.9552 ║ $9000 ║
║ May 07, 2018 ║ 0.0532 ║ 1.0084 ║ $9500 ║
╚══════════════════╩═══════════════╩═════════════════╩════════════╝without DCA:
╔═════════════════╦═══════════════╦═════════════════╗
║ DATE ║ BTC Purchased ║ Total BTC (sum) ║
╠═════════════════╬═══════════════╬═════════════════╣
║ January 1, 2018 ║ 1 ║ $13,400 ║
╚═════════════════╩═══════════════╩═════════════════╝Peter bought one Bitcoin over time for a total of $9500 regardless of the price. Claudia, on the other hand, bought the Bitcoin at once and had to spend $13,400.
In this case, Claudia spent significantly more than Peter and she lost on the opportunity to buy when the price is lower.
The good thing about the data is that it is widely available and this strategy is not hidden behind doors but can be utilized by everyone.
At Trader1, we provide you with a secure and easy to use platform to make use of this strategy.
Sign up now and enjoy a free account with unlimited orders on multiple exchanges.
May the force be with you,
Steffen
