If you're new to the crypto space you may have wondered when a good time to buy is. Or perhaps you've already made the rookie mistake of FOMO (short for fear of missing out) buying when the coins are "going to the moon" but only to have the bags dumped on you. If you've ever experienced either, you're not alone. I've definitely experienced both when I first started out in the crypto space in early 2017.
It wasn't until I had gotten burned that I decided to ask others more knowledgeable than I was when the best time to buy was. A lot of the times when I had asked, the responses were "Just DCA" or some variation of that. So I searched what these people were exactly referring to and found out that it's an investment strategy also known as "dollar cost average."
Dollar cost averaging is when you buy the same dollar amount of something in fixed intervals; when the price goes up you buy less, but if the price goes down you buy more. These intervals could be daily, weekly, bi-weekly, monthly, and etc. The intervals themselves don't really matter, but what matters more is that you follow what you've set up for yourself.
Dollar cost averaging has a lot of merit to it. Here are a few reasons as to why people subscribe to this investment strategy.
The first is that most people can't time the market. Timing the market means that you're buying the exact tops and exact bottoms with a great deal of accuracy. This is not to say that you can't be profitable from trading, because you can be. However, for the majority of people it's quite difficult to achieve and thus dollar cost averaging helps you to capture the average prices of whatever it is you're buying. There's a saying that it's not timing the market that counts but rather the time in the market that matters. A Google search on that saying will give you countless results on why the ladder is better.
The second is that it mitigates risk. Crypto is a very volatile asset class as we all know. It's not uncommon for prices to swing up or down a good 10% in a day; on March 12th earlier this year, the price of Bitcoin alone plummeted more than 50% in a single day. By dollar cost averaging, you're able to screen out this volatility because it's irrelevant to your overall investment strategy in the short term. In addition, this takes out any emotions involved with buying. If you're someone who has emotions tied to how well or poorly the market does, then dollar cost averaging can help remove those emotions involved. You no longer need to feel anxious every time you see your portfolio in the red.
The third reason is that it's a great easy and passive way of investing where you just "set and forget." If you're someone who likes passive investing such as with low cost index funds where you're able to get exposure to a diversified basket of securities, then dollar cost averaging may be of interest to you.
The last is that it can help with budgeting and planning your finances and investments. I'll demonstrate this in an example.
There may be other reasons why people dollar cost average but I would say that those are the majority of them.
Now that we understand why people like to dollar cost average, let's understand the mechanics behind it. Everyone has different circumstances in terms of income, expenses, risk tolerance, outlook on Bitcoin, and etc. and thus will affect the frequency and how much one decides to invest or put in to Bitcoin.
EXAMPLE:
Alex makes $60,000 a year and pays 30% in taxes. After taxes, that's $42,000 that he gets to keep. Of the $42,000, Alex still has expenses that he needs to pay though. His expenses are $2,500 a month in total or $30,000 over the course of a year. This means that Alex is left with $12,000 for the whole year. Of the $12,0000 though, he only wants to put 10% of that money in to Bitcoin. This works out to be $1,200 for the entire year.
Some possible options where Alex could dollar cost average his buys are $100/month ($1,200/12 months), $45/bi-weekly ($1,200/26 bi-weeks), or even $23/weekly ($1,200/52 weeks). The choice is ultimately up to Alex but he should choose an interval that works for him and to stick with it.
By dollar cost averaging his buys, Alex no longer needs to feel anxious about the price should it take a dive down as he didn't go all in at a single price. He's got plenty of "ammo" on the side to buy more should price go down.
Here's a video that may be of interest to you. It shows how well one would have done just from dollar cost averaging Bitcoin over the years:
I hope that this post has given you some insight on why one would choose to dollar cost average. However, I will say though that dollar cost averaging isn't for everyone as we all have different circumstances. However, if you're interested in dollar cost averaging and live in Canada though, check out Bull Bitcoin as they've got a great auto DCA feature. Get yourself a $10 "loyalty credit" by using this link:
Get A $10 "Loyalty Credit" From BULL BITCOIN
For others who have been in the crypto space for longer, I would love to read and learn what your investment strategy is. Do you also DCA or do you have another method?
If you have any questions or comments, please feel free to leave them down below as I will respond. You can also contact me at crypto4canadians@gmail.com. You can also message me on Telegram @cryptoforcanadians or feel free to join my Telegram group where we talk crypto: https://t.me/crypto4canadians.