What is Dollar Cost Averaging & How Does It Apply To Cryptocurrency?

by | Jan 10, 2018 | Bitcoin

What is Dollar Cost Averaging & How Does It Apply To Cryptocurrency?

This is my best thoughts on what has been proven to be the most effective way to..

  • Protect yourself from market drops
  • Take advantage of market gains

I’ll be honest with you, I got in earlier than a lot of other people into crypto.   What works best is what is called dollar cost averaging and it will give you the best chance of making money with the lowest risk possible. 

What is Dollar Cost Averaging?

First, it’s important to understand something. No one can time a market.  Anyone who tells you they can do that consistently is lying to you. Don’t believe the hype.

Second, this is not for day traders. If you want to buy something and sell it minutes, hours or days later, this is not going to be helpful.   I dont do much day trading and primarily in it for the long term although I do invest once in a while.

Dollar cost averaging works the best when:

  • You believe the overall market is going up over the long term (12+ months)
  • Things are volatile (you don’t have a clear entry point)

The premise behind DCA (dollar cost averaging) is that you will be spreading your investment over a long window of time as opposed to buying in all at once.

Here’s an example to illustrate this using $10,000 in free cash:

Scenario 1: You are waiting for a market correction or dip in price. You’re watching the price of bitcoin each day and BAM – you see it go down 15% in one day.

You open up your Coinbase (click here for free $10) account and immediately buy $10,000 worth of Bitcoin. You sit back, proud of yourself, waiting for the ticker to start going back up forever.
Coinbase > theshoppersexpress.com/click/coinbase

You just put ALL your chips on one market move. For all you know, the market could keep going down or it could turn around.

This is really risky and often doesn’t even lead to better returns overall! You may have caught one 15% dip, but you missed the 30% dip that’s coming in 3 weeks.

This is not a recommended strategy in finance or in cryptocurrency. Never put all your eggs in one basket.

Scenario 2: Instead of waiting for a market correction, you divide your $10,000 into $500 “blocks.”

Based on your medium risk tolerance (i.e. you want to make money but you want to avoid losing it if possible), you buy $500 worth of Bitcoin today.

You don’t give a shit what the price is. For all you know, it could be up 20% or it could be down 20%. You buy in anyway with 5% of your cash.

In one week, you do the same thing – buy $500 worth of Bitcoin. During that week the price went up 10%. You may be frustrated that you didn’t go all in, but you did get 10% return on your first $500 so it’s not a total loss.

One week after that you buy another $500. This time Bitcoin has dropped 18%. Now you’re STOKED that you didn’t put all $10,000 in at once. You’re getting a great deal on the new Bitcoin which will definitely outweigh the lost profits from the first two buy ins.

You repeat this each week for the next 17 weeks (for $10,000 total buy in). Each week the price will be different. Some weeks it’s up, some weeks it’s down.

But your risk is SO MUCH LOWER. Do you see how you’re protecting yourself from losing it all on one market move but also getting the upside from buying during the dips?

At the end of your 20 week journey you have invested your $10,000 and own however much crypto the market allocated. You didn’t make 70% ROI but you also didn’t lose 70%.

Because you believe that the market is going up overall (like I said before), you sit back and watch the total value of your portfolio increase over time.

Do you see how powerful this is? You’re removing your emotions and your personal feelings from the equation. You are spreading out your risk and riding the rising tide of the market.

This is how the best investors do it in finance and how you should be doing it in crypto.

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