Dollar Cost Averaging Bitcoin
You're here because you either want to learn how dollar cost averaging bitcoin works, or because you want to understand the concepts of DCA in general. I'm going to make sure you take away both an understanding of the concepts around dollar cost averaging as well as practical steps to take in order to dollar cost average into cryptocurrencies (BTC in this case).
For full disclosure, I do not own any Bitcoin or other cryptocurrencies.
What is Dollar Cost Averaging?
This is the fundamental question we need to answer before we dive into exactly how to do it.
Answer: Dollar-cost averaging (DCA) is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. [Investopedia]
- Essentially what it means is to create a schedule of purchases based on a fixed dollar amount. For example, $100 every Friday.
- The second requirement of dollar cost averaging is that you stick to that schedule no matter what!
Dollar cost averaging fundamentally requires you to have a schedule of purchases that you commit to regardless of any influences such as Bitcoin price fluctuations, Twitter messages, or news scares.
Why Dollar Cost Average Anything?
You don't have to dollar cost average just into Bitcoin. You can do it with any investment on the planet.
Dollar cost averaging is an extremely popular way to purchase into investments without fear of timing the market. By purchasing on a schedule you're guaranteed to avoid the exact bottom or top of a price movement.
When BTC is selling for more money your $100 purchase amounts to less Bitcoin per purchase. But that very next week when Bitcoin prices have fallen, that same $100 will buy you more Bitcoin per dollar.
In this way, your average purchase price will be much smoother than the erratic price swings in the market.
Bitcoin Dollar Cost Averaging Example
I'll illustrate with an example why DCA strategies help us avoid having to time the top and bottom of the market.
Dollar Cost Average Example
Let's assume that you're using a dollar cost averaging method of buying Bitcoin on the first day of every month. You use this method to buy in throughout 7 months from January to July.
As it turns out, you ended up purchasing Bitcoin both at its lowest and highest possible values during this time window (according to this example graph).
However, thanks to Dollar Cost Averaging your average Bitcoin price was $12,143.
Can you identify the absolute best time to buy BTC according to this chart? That's right - it would have been best to buy all of your BTC in January at $8,000. Looking back that's easy to see - but at the time you would have had no idea.
Can you identify the absolute worst time to buy BTC according to the chart? Of course, it would have been July! Again though it is impossible to tell at the time, only in retrospect.
Thanks to dollar cost averaging your entrance into the Bitcoin market was smoothed out and you could sleep easily at night knowing that DCA will help you find the middle ground.
Why Bitcoin is So Easy To DCA
Bitcoin makes a perfect candidate for dollar cost average investing for one glaring reason. It's bought and solid in fractional shares down to tiny decimal points.
If you couldn't buy fractions of Bitcoin it wouldn't really be possible to DCA into it. You would have to buy entire Bitcoins each time you want to buy in. That means you'd need (at this points) several thousand dollars a week to buy a new Bitcoin.
That's not really possible for most of us.
Fortunately, we can buy fractions of a Bitcoin. That means you can dollar cost average your way into the Bitcoin market with $10 a week (or even less if you really wanted).
How Do I Actually Do This!?
Good question. I had to do my research on it because I don't actually know either. If you read the disclosure at the top you already know I don't own Bitcoin.
However, like any good tool for dollar cost averaging an investment, there are commonalities we can look for!
- You'll need an app or software that allows you to set up regularly scheduled deposits from a bank account.
- That same app or software needs to then buy Bitcoin for you each week with that money.
Since this article is not a comparison of various Bitcoin apps and software I won't even begin to debate the merits of which one to use. Suffice it to say, however, that Coinbase definitely has the functionality you need for the dollar cost average method.
Leave a comment below if you know of other crypto apps and software with good DCA features and I'll update the article to reflect them.