A Simple Yet Highly Effective Approach to Buying Bitcoin
Why dollar cost averaging (DCA) works well for bitcoin.
In my previous article, I presented an investment case for bitcoin, i.e. why you should buy bitcoin. A common follow up question then is: how much to buy? How often should I buy?
In short: A good approach to investing in Bitcoin is through dollar cost averaging (DCA).
By the end of this article, you should be able to understand why this is the case.
But first, let’s do a quick introduction. What is the DCA method?
DCA means you invest a fixed amount of money into something at regular intervals (e.g., weekly, monthly) regardless of the price at that time.
For example,
1000 bucks (fixed amount)
every Wednesday (regular interval)
into bitcoin (what you are investing in).
Most people who invest regularly know about DCA. It is not a difficult concept.
Yet, it is not easy to do for bitcoin. Generally, people who start buying bitcoin without proper knowledge tend to overcomplicate things (myself included).
Usually, people start trading Bitcoin instead of investing in it, i.e., trying to time the market, choosing what price to buy, setting stop losses, taking profits, etc.
That might work if you are an experienced investor with a decent amount of capital. Even then, trading is extremely difficult, and it requires a completely different mindset compared to investing.
Given bitcoin’s (and crypto’s) general volatility, it is tempting to try to trade them. But this often leads to poor decision and losses for most people.
Hence, what is required is the knowledge to understand what you are getting into and whether that something is worth investing in (rather than trading).
Lets go through why DCA is suitable for bitcoin together in 3 simple sections as usual.
Pros and Cons of Dollar Cost Averaging
DCA Performance in Bitcoin’s Case
Bitcoin’s “10 Best Days” Phenomenon
1. Pros and Cons of Dollar Cost Averaging (DCA)
Firstly, I am not arguing that DCA is the best and only way to make all your investments.
As with most things, it’s important to consider both the upsides and downsides before making your decision.
There are plenty of articles out there that explains DCA in greater detail but I will highlight some points that are important:
Pros
Reducing average purchase cost over time
DCA can reduce your average price over an extended horizon, especially if that asset has fairly irregular price movements
This strategy can help you accumulate assets at a more favorable average price.
Check out this example below for a comparison between lump sum (investing everything in one go) and a DCA strategy over a 6-year period
Amidst the price changes (green line), the DCA method resulted in more units purchased, lower cost, and a higher investment return (almost 3% higher)
Source: Manulife Investment
Saves time and mental energy
Investors do not need to spend time actively monitoring asset prices if they are investing over a set time horizon.
Allows consistent purchases for investors with limited capital
Rather than a lump sum (lets say $10,000) investment, it may be more practical for some people to do $1,000 a month for 10 months as their monthly salaries or other income sources come in
Reduces impact of emotions causing irrational decisions
The hardest part of investing is managing your emotions, especially if you witness a sudden price movement leading to panic selling or panic buying (due to fear of missing out)
DCA alleviates that emotional aspect and minimizes the likelihood of making rash decisions that lead to losses
Cons
Potential to miss out returns
If something is constantly increasing in price, the cheapest purchase is when you buy early in one go (called lump sum investing).
DCA means you are buying the asset at an ever increasing price.
However, it is rare to find investments like these.
Example below shows a scenario of a generally appreciating investment (the S&P500), and the difference between DCA versus lump sum. Pay attention to the green and blue cases, as both cases deployed $10,000. Lump sum investing resulted in higher return.
Source: Ecoinometrics
Risk of asset failing
While DCA encourages consistent savings/investment, it does not remove the risk of a failing asset (Deutsche Bank example below)
Some amount of monitoring is still required to ensure you do not continue to invest in a failed (or failing) asset.
Source: Ecoinometrics
With the pros and cons listed out, lets see how DCA applies to bitcoin.
2. DCA Performance in Bitcoin’s Case
All the benefits of DCA mentioned above apply to bitcoin. It is still a highly volatile asset, but volatility is not necessarily a bad thing. Where there is volatility, there is opportunity. That means there are possible upsides to enjoy.
Lets zoom out and look at the price of bitcoin since 2016.
For comparison, here is the price of gold since 2011.
Even gold, popularly known as a “resilient asset” and a good “store of value”, experienced high levels of volatility. At its extreme, the price of gold went from $1,800 per ounce to $1,075 per ounce from 2011 to 2015, a 40% decrease.
As of August 2024, the price is at an all-time high of $2,475 per ounce. However, for gold to reach that price, it also had to endure years of price fluctuations, e.g. from 2016 to 2018, and from 2020 to 2024, before going through major price increases.
Does that mean gold is a bad investment?
No. Gold is still a good store of value over the long term.
The same applies to bitcoin.
It takes time to understand and learn this fact about bitcoin. The faster you get it, the more advantage you will enjoy.
Anyway, I digress. People often say they lose money on bitcoin, but thats likely because they attempted to trade bitcoin. So, lets look at how you would have performed if you consistently invested (i.e. DCA) in bitcoin for different scenarios.
Lets say you have $300 to invest every month. You decide to start buying bitcoin around November 2021 near its previous all-time high at roughly $69,000. The $10,200 invested would be worth $21,560 in August 2024. You enjoy a 111% increase in 3 years, with an annualized return on investment of roughly 27%.
Source: dcabtc.com Let’s say you started even earlier. You begin to DCA $300 every month from January 2018 onwards at around $18,000, near another previous all-time high. The $24,000 you invested would be worth $122,300, almost a 410% increase by August 2024, with an annualized return on investment of roughly 30%.
Source: dcabtc.com
The annualized return of investment of the S&P 500 is roughly 11-13% between those same time periods (including dividends), compared to the 27-30% of bitcoin. A three times difference in returns between the two.
Bitcoin is far superior to the S&P 500 over the long term if you look at it purely from a financial returns perspective.
Point being: with DCA, there is no “best time” to buy bitcoin, because the price movements are hard to predict in the short term.
The goal with DCA is to accumulate as much bitcoin as possible, while reducing the average purchase price.
As mentioned above, you can attempt to achieve higher returns by doing a lump sum investment (e.g. $10,000 invested in one go when bitcoin was still $7,000), but it may go through a sudden decrease in the short term, which will give you unnecessary stress.
Of course, past performance is not an indication of future performance. That is why we need to understand the underlying value of bitcoin that make it such an attractive asset to invest in.
Again, refer to my previous article for more information on the investment case for bitcoin.
3. Bitcoin’s “10 Best Days” Phenomenon
Studies show that most of bitcoin's gains come in just a few days every year. I call it the “10 Best Days” phenomenon.
Missing those days could mean missing out on most of the price increase.
Murray Rudd has summarized this 2022 study by BlackRock (the largest asset manager in the world managing more than $10,000,000,000,000 or $10 trillion). You can find his work here. The key point is:
From 2010 to 2021, bitcoin saw an average return of 467% per year in 3.6% of the time.
Lets do the math:
The period from 2010 to 2021 covers 12 years.
During this time, there are a total of 4,380 days (assuming 365 days per year).
Now, focusing on the 3.6% of the time when Bitcoin experienced those exceptionally high returns, this equates to about 157 days over the entire 12-year period.
When averaged out per year, this means that approximately 13 days per year fall into this high-return period.
In other words, during each year, there are roughly 13 days where Bitcoin's price dramatically increases, contributing to most of its gains.
Do you think anyone can both accurately and consistently predict those 13 days of exponential increase every year?
Therefore, time in the market (staying invested) is much more important than timing the market (trading). This is a general statement in investing, but is doubly true for bitcoin.
This is another reason why DCA works well. You consistently buy bitcoin and keep your stash, so that it can enjoy those few days of exponential increase.
Delayed gratification as its best.
Again, past performance is not an indication of future performance. But you get the message.
Summary
In short, dollar cost averaging (DCA) works well for bitcoin because:
It levels out the averaging purchasing price (even if you are buying near the market top) of a volatile asset.
It reduces the urge to trade due to panic selling or fear or missing out, potentially resulting in high losses.
It builds up your bitcoin stash over time consistently (as a form of savings).
It ensures you do not miss out the largest returns over short periods of time every year.
Even though DCA is a simple concept, it is difficult to stay committed to it because bitcoin’s price is volatile, and “volatility” is often associated with “risk”.
And people then start to trade bitcoin.
But once you understand bitcoin more, you will likely be at peace with the price movements of bitcoin.
A couple of reminders to help you start that journey:
Reminder one: even gold, a “resilient asset”, often goes through extended periods of volatility.
Reminder two: most traders lose money.
That’s all for this week’s article. I hope you enjoyed the read. Next week, we will change gears and look at a psychological aspect of bitcoin adoption using a popular concept called game theory.
Disclaimer: The information provided in this publication is for informational purposes only and does not constitute financial advice. Readers are encouraged to do their own research and consult with a licensed financial advisor before making any investment decisions.