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 are simply committing to buying the same dollar amount of a specific crypto at regular intervals, regardless of short-term price volatility. You can think of this as a “set it and forget it” crypto investment strategy.
This strategy works best, of course, with a cryptocurrency such as Bitcoin (BTC 0.37%) that has the potential for long-term price appreciation. In fact, some crypto investors say that Bitcoin is really the only crypto that is suitable for a DCA investment strategy. So what would happen if you decide to buy a specific amount of Bitcoin every month?
Historical benefits of dollar-cost averaging
One way to see how well this Bitcoin investment strategy might perform in the future is to back-test it based on historical results. There are plenty of online tools that enable you to do exactly 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 downturn this year that would have wiped off a significant portion of your profits.
Of course, you can change any of these parameters. Instead of investing $100 per month, you might only be comfortable investing $10 per month in Bitcoin. Even if you had only invested $10 per month in Bitcoin for the past three years, though, you would have turned $360 into $857. In fact, over just about any medium- or long-term time horizon longer than two years, you would have turned your monthly Bitcoin investment into an impressive profit.
Change in investment outlook
It is not just your portfolio that is going to change once 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 are no longer trying to time the lowest lows and the highest 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 be checking it monthly. In short, you will be transforming from a short-term investor into a long-term investor.
Even if your Bitcoin position is losing money on an absolute basis, you will be confident that, over a long enough period of time, you are actually reducing your average purchase price of Bitcoin. You are essentially buying the dip over and over and over again, at regular intervals, for months on end. You are accumulating Bitcoin at the fastest rate during bear markets, and then scaling back your buying pace during bullish markets. This is essentially doing the opposite of what many casual investors do.
Ability to see the big picture
Finally, you will begin to notice your ability to distinguish the “signal” from the “noise.” If you are tracking Bitcoin on a daily basis, it’s hard to understand what matters, and what does not, in terms of its valuation. The market just seems crazy and chaotic. Bitcoin has massive intraday volatility and every new bit of news seems like it is moving the market. Over time, this has an enormous impact on your mental and emotional state.
But if you are committed to a DCA crypto investment strategy, you can see how certain events — such as the recent decision by top institutional investors to put their money into Bitcoin — have a much greater impact on the long-term direction of the crypto market than the latest news you might see on CNBC. By committing to a DCA investment strategy, you will become a much better long-term investor overall, not just when it comes to crypto.
Pros and cons
Of course, just keep in mind that all long-term investment strategies have their share of pros and cons. The same is true for dollar-cost averaging into Bitcoin. For example, one con of this strategy is that you won’t be getting the absolute best price for Bitcoin at any time. You will be getting much more of a “blended” price because you are not trying to time the market.
Another potential con, of course, is that the price of Bitcoin might go to zero. So, even if you are getting a great price on Bitcoin for years, it won’t matter in the end if your entire investment goes to zero. While Bitcoin now has a 10-year track record that we can back-test for different 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 that involves Bitcoin. Suppose you believe that Bitcoin will appreciate in value over the next decade, just as it has over the previous decade. In that case, Bitcoin could make for a great example of how to dollar-cost average into cryptocurrencies.