Updated: Jun 15
In every bitcoin bull market, a new crop of crypto-gurus emerge to “innovate” high-risk, untested, and complicated buying strategies to outperform bitcoin, which work well for some time ... until they do not.
If you are new to Bitcoin, you should prioritize learning over investment and returns. Bitcoin is highly volatile, and that is a good thing since nothing tame and predictable can be that disruptive. However, unless you have a strong foundation of knowledge to fall back on in rapid price declines, you WILL get anxious and sell your bitcoin, only to find out that you missed out the next recovery. Crypto-gurus get unusually quiet in bear markets so don’t count on them either.
Do not exceed your conviction!
Do not buy for reasons other than your personal long-term conviction. If your reasons to buy are “others are buying, it must be good time to buy”, “This YouTube influencer is bullish on it”, “I feel it will go higher”, gambling, etc., DON’T!
Learn and understand Bitcoin first. You will save yourself some new pants in a few months when price dips viciously. FOMO-buying is the recipe for weak hands and the ever-repeating pattern of novice investors buying high and selling low. Bitcoin is the best money known to the human-kind, which is disrupting the world of finance. Don’t approach it as a short-term get-rich-quick scheme. Rather, learn about and invest on the long-term value proposition.
Bitcoin’s exponential price rise is refreshed from time to time with the blood of price predictors and speculators. Many have fallen victim to market timing that turned out a disaster after initially appearing to work. Do not try to time the market; be smarter than that! Caught between violent price corrections, mistakes, emotions, and taxes, you would be lucky to come out unharmed.
What is the best strategy for investing in Bitcoin?
There is no best strategy for everyone, but there is a great strategy for most: Dollar Cost Averaging (DCA)!
DCA is the practice of periodically purchasing (e.g., daily, weekly, monthly) a set amount of an asset with no regard to its price. For example, buying $30 of Bitcoin everyday no matter how high or low you “think” the price will go in the future. If price goes lower tomorrow, you still buy $30 but accumulate more Bitcoin, and if the price goes up, you end up buying less bitcoin.
This is not a gospel! There could be variations to it where you slightly adjust the purchasing amount based on a well thought out risk analysis, but we don’t get into that in this article.
Why it makes sense
It is simple!
Simplicity is under-rated. Especially, when it comes to such complex systems like financial markets, simplicity is your friend. With DCA, you just buy once every period, and using a variety of services out there, you can even automate it. There is no calculation and analysis needed. ZERO cost!
Long-term gains, without the short-term risk
DCA is the simplest, yet surprisingly, highly safe and effective investment strategy for an asset in which you have conviction. DCA is the cure for volatile markets. It allows you to remove the short-term swings and benefit from the long-term trend. You only need to get your long-term thesis right but not the day-to-day price action.
For an asset class like Bitcoin that has an exponential long-term appreciation, but also wild short-term price swings, DCA offers the best of both worlds. With DCA, you get the full long-term trend and avoid getting caught off guard in the short-term swings.
DCA effectively averages out price swings. You get the average price – a fair price. Most people cannot time the market to buy at very low prices, conversely, new comers usually buy at the local tops. DCA prevents you from falling into this trap and seeing your holdings depreciate significantly right after you got in.
Under DCA, you do not outperform the market. That must be bad right? No. Statistics show that barring a tiny fraction of big players with access to proprietary information and tools, most market participants cannot outperform the market. DCA lets you simply accept this fact and avoid falling into the market timing trap.
“Most fortunes in this country have been made by those who were right about their company, not by timing the market” – Warren Buffet
More importantly, DCA prevents you from under-performing the market and puts you in a safe position. Rather than maximizing short-term gains, it is much more important to minimize risk and make sure you survive to see your long-term thesis play out.
“In order to kill it in the markets, you have to not get killed first”
Removes the guess work
Think of this scenario:
Price dips 10%. You think it’s a golden opportunity you buy a very large amount.
Turns out it was just the beginning of a major 50% dip. You see your holding bleeding heavily and you have very little cash left to deploy (BAD!)
You think, with the bitter experience of a premature purchase last time, I will not buy and wait for the dip to end.
The price moves up 10%. You think the dip is over and buy with the rest of your cash.
Price corrects another time and you have no cash to deploy (Ugh…!)
A few days later, you get paid, and the price has gone up 30%. You think you're late and bitcoin is expensive now. With the experience of price dip right after a hasty purchase, this time you try to be more patient. Wait like a shark for prices to drop.
Guess what?! Bottom is already in and the price keeps rising while you keep your cash.
Price keeps accelerating and enters into a bubble. At much higher prices, you capitulate and buy. Only to see the bubble burst and leave you extremely frustrated.
Pretty painful huh?! It gets worse: most people go through the above journey while spending hours and hours reading market prediction analyses and trying to find a needle of signal in a haystack of information provided by the gurus with crystal balls.
You wasted valuable time that could have gone toward advancing your career and failed in outperforming the market.
It fits most people’s income patterns
Most people are wage earners or business owners where they have periodic cash flows rather than sudden ones. Lump-sum investing is just not possible for these individuals. DCA fits well with this cash flow pattern.
If you made it so far, it’s great! But you don’t have to just take our word. Let’s verify!
We will be using dcabtc.com to calculate returns of various DCA strategies. We will look at how much you invest, how much it returns, and how much risk it carries. As a simple measure of risk, we look at the maximum loss you would have experienced. Our latest price data point in this analysis is from April 14, 2022.
- Buy $30 of bitcoin every day
- Period of analysis: the last 6 years
- Total Invested: $ 65,730
- Total Value (at the end of the period): $872,842
- Percent Change: 1,228%
- Maximum loss: Negligible
See the performance chart below. The orange line is the total value of your bitcoin at any time, and the green is the total dollar amount investment.
That is a Compound Annual Growth Rate (CAGR) of 52% for six consecutive years (= 12.28^1/6-1) ultimately a 12x growth!
All the while holding a defensive posture. In the brutal crash post the last cycle peak, where price corrected a whopping 84% from $19,623 to $3132, you would not have gone into the red and, in fact, been up by 50%.
Just for comparison, the same DCA strategy would have generated only 22% for gold and 37% in a Dow Jones Index (DJI) fund.
What if you got in later? If you got in later, in the absolute worst time, the cycle top on the first day of 2018, you would be at break-even by the end of July 2018 when price had dropped by 56% to about $8400. How is this possible? The answer lies in the fact that DCA allows you to accumulate in the dips. This sets you up to recover long before the price fully recovers.
Now let’s assume you started DCA’ing 3 years ago, in the middle of May 2019, when the price was around $8200. Bitcoin appreciated until June to more than $13,000, but corrected rapidly and steadily afterwards, culminating in the brutal crash of March 12th, 2020, where it hit a low of $3850. In this period, the maximum draw-down from the highs was a whopping 72%! But then, the bull market began and the price reached a high of $69000.
- Buy $30 of bitcoin every day
- Period of analysis: the last 3 years
- Total Invested: $32,880
- Total Value (at the end of the period): $94,267
- Percent Change: 186% (vs. 5.18% for Gold and 18% DJI)
- Maximum loss: 44% (March 12,2020)
- Loss recovery period: 6 weeks (By April 28, 2020)
You started in a relatively bad period, and kept buying at higher prices before the crash of 2020. Throughout the crash, you were buying and reducing your average price. As a result, your maximum draw-down was significantly lower than what it could have been, and you benefited from accumulating at very low prices after the crash.
Just for some additional fun, if we slightly modify the timing and say you got the worst possible timing in 2019, which was at the high of $13,000 in June, nothing would have changed materially. You would have still been up by 170% with a maximum loss of 45% fully recovered in 6 weeks. This shows the robustness of DCA as an investment strategy, since it effectively makes the starting point irrelevant.
Now let’s say you were living under a rock and only heard about bitcoin when price was in the high 60’s mid-April 2021. You ultimately decided to begin DCA’ing at the local top of $64,000 – one of the worst possible timings. You keep DCA’ing for one year until April 14, 2022. Compared to when you entered, the price is down by 39% to $39,000. Let’s see your performance.
- Buy $30 of bitcoin every day
- Period of analysis: one year beginning in April 14, 2021
- Total Invested: $10,950
- Total Value (at the end of the period): $10,070
- Percent Change: -8%
- Maximum loss: 23% (March 12, 2021)
- Loss recovery period: 3 weeks (ending in February 7, 2021)
The maximum price draw-down during the period of analysis was -53% (beginning six months prior and not even recovered by half until April 14), whereas, the maximum pain for you was -23% which only lasted 3 weeks. If the price only regains the $42,000 level, you would break-even.
As you can see, DCA works fantastically for a highly volatile asset like bitcoin. Even during very violent draw-downs your purchases would only modestly depreciate while allowing you to buy the dip. Even with a terrible timing, you would still do great with DCA. The final lesson from this analysis is the longer you are in the market the better off you are.
“It’s about time in the market, not timing the market”
Update, June 15, 2022: Thanks to one of our community members, this article has been translated to Farsi:
Download PDF • 516KB