Many people may non realize information technology, merely a popular strategy for investing in stocks -- dollar-price averaging (DCA) -- tin too 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 cost volatility. Yous can remember of this as a "set it and forget information technology" crypto investment strategy.
This strategy works best, of course, with a cryptocurrency such as
Bitcoin
(BTC
-0.21%)
that has the potential for long-term cost 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-toll averaging
One fashion to see how well this Bitcoin investment strategy might perform in the future is to back-test it based on historical results. There are enough of online tools that enable y'all to do exactly that. So, for example, if y'all had invested $100 every month in Bitcoin for the past three years, you would accept turned $3,600 into $eight,570. That, despite a huge market downturn this year that would have wiped off a significant portion of your profits.
Image source: Getty Images.
Of course, yous can change whatever of these parameters. Instead of investing $100 per month, yous might only exist comfortable investing $x per month in Bitcoin. Fifty-fifty if you had only invested $10 per month in Bitcoin for the by three years, though, you would have turned $360 into $857. In fact, over only nearly whatsoever medium- or long-term time horizon longer than two years, y'all would have turned your monthly Bitcoin investment into an impressive profit.
Change in investment outlook
It is not simply your portfolio that is going to change once you commit to investing in Bitcoin every month. Yous will as well start to see a alter in your investment outlook and the mode you view the crypto markets. Afterward all, you are no longer trying to time the lowest lows and the highest highs. You lot are no longer paralyzed past market volatility or the fear of missing out (FOMO). Yous are no longer glued to your laptop or mobile device, constantly refreshing your screen to meet how well your crypto investments are doing. Instead of checking your Bitcoin position daily, you lot will exist 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 exist confident that, over a long enough menses of time, you are really reducing your average buy price of Bitcoin. You are essentially ownership the dip over and over and over again, at regular intervals, for months on finish. You are accumulating Bitcoin at the fastest rate during conduct markets, then scaling back your ownership pace during bullish markets. This is substantially doing the reverse 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 "dissonance." If you are tracking Bitcoin on a daily footing, it's difficult to empathize what matters, and what does non, in terms of its valuation. The marketplace simply 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 touch on on your mental and emotional state.
But if you are committed to a DCA crypto investment strategy, you tin run into how certain events -- such as the recent determination by pinnacle institutional investors to put their money into Bitcoin -- take a much greater impact on the long-term direction of the crypto market than the latest news you lot might see on CNBC. By committing to a DCA investment strategy, you volition get a much better long-term investor overall, not merely when information technology 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 truthful for dollar-price averaging into Bitcoin. For example, one con of this strategy is that y'all won't be getting the accented all-time toll for Bitcoin at whatsoever time. You volition be getting much more of a "blended" price because y'all are not trying to time the market.
Another potential con, of grade, is that the toll of Bitcoin might go to zero. So, fifty-fifty if y'all are getting a great price on Bitcoin for years, it won't affair in the finish if your entire investment goes to null. While Bitcoin at present has a ten-year rail record that we can dorsum-test for different investment approaches, this 10-yr track tape still pales in comparison to the near 100-twelvemonth rails record that we take for the stock market.
Then, e'er exercise your own enquiry before committing to a new investment strategy, particularly one that involves Bitcoin. Suppose you believe that Bitcoin volition appreciate in value over the adjacent 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.
