This is what happens when you invest in Bitcoin every month
Many people may not realize it, but a popular strategy for investing in stocks – dollar cost averaging (DCA) – can also be an effective long-term strategy for investing in crypto. In very basic terms, you simply commit to buying the same dollar amount of a specific crypto on a regular basis, regardless of short-term price volatility. You can think of this as a “set it and forget it” crypto investment strategy.
Of course, this strategy works best with a cryptocurrency such as e.g Bitcoin (BTC 0.35%) which has the potential for long-term price increases. In fact, some crypto investors say that Bitcoin is really the only crypto suitable for a DCA investment strategy. So what would happen if you decide to buy a certain amount of Bitcoin every month?
Historical benefits of dollar cost averaging
One way to see how well this Bitcoin investment strategy might work in the future is to back-test it based on historical performance. There are many online tools that allow you to do just that. So, for example, if you had invested $100 every month in Bitcoin for the past three years, you would have turned $3,600 into $8,570. That, despite a huge market decline this year that would have wiped out a significant portion of your profits.
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Of course, you can change any of these parameters. Instead of investing $100 per month, you may only be comfortable investing $10 per month in Bitcoin. However, even if you had only invested $10 per month in Bitcoin for the past three years, you would have turned $360 into $857. In fact, over just about any medium or long time horizon longer than two years, you would have turned your monthly Bitcoin investment into an impressive profit.
Change in investment outlook
It’s not just your portfolio that’s going to change when you commit to investing in Bitcoin every month. You will also start to see a change in your investment outlook and the way you view the crypto markets. After all, you’re no longer trying to time the lows and highs. You are no longer paralyzed by market volatility or the fear of missing out (FOMO). You are no longer glued to your laptop or mobile device, constantly refreshing your screen to see how well your crypto investments are doing. Instead of checking your Bitcoin position daily, you will check it monthly. In short, you will transform yourself from a short-term investor to a long-term investor.
Even if your Bitcoin position loses money on an absolute basis, you want to be sure that over a long enough period of time you are actually reducing the average purchase price of Bitcoin. You basically buy the dip over and over and over again, at regular intervals, for several months. You accumulate Bitcoin at the fastest rate during bear markets, then slow down your buying pace during bullish markets. This essentially does the opposite of what many casual investors do.
Ability to see the big picture
Eventually you will begin to notice your ability to separate the “signal” from the “noise”. If you’re tracking Bitcoin on a daily basis, it’s hard to understand what matters, and what doesn’t, in terms of its valuation. The market just seems crazy and chaotic. Bitcoin has massive intraday volatility and every new piece of news seems to move the market. Over time, this has a huge impact on your mental and emotional state.
But if you’re committed to a DCA crypto investment strategy, you can see how certain events—like the recent decision by top institutional investors to put their money in Bitcoin—have a much bigger impact on the long-term direction of the crypto market than the latest news you can watch CNBC. By committing to a DCA investment strategy, you will become a much better long-term investor overall, not just in crypto.
Advantages and disadvantages
Remember, of course, that all long-term investment strategies have their share of advantages and disadvantages. The same goes for the average dollar cost of Bitcoin. For example, a disadvantage of this strategy is that you will not get the absolute best price for Bitcoin at all times. You will get much more from a “mixed” price because you are not trying to time the market.
Another potential downside, of course, is that the price of Bitcoin could go to zero. So even if you get a good price of Bitcoin for years, in the end it won’t matter if your entire investment goes to zero. While Bitcoin now has a 10-year track record that we can back-test for various investment approaches, this 10-year track record still pales in comparison to the nearly 100-year track record that we have for the stock market.
So always do your own research before committing to a new investment strategy, especially one involving Bitcoin. Suppose you believe that Bitcoin will increase in value over the next decade, just as it has in the past decade. If so, Bitcoin may provide a good example of how to dollar-cost average cryptocurrencies.
