There are many ways to make money in crypto. Some people prefer trading and others long-term investment. Today I’m going to share with you a strategy designed for people who look at crypto from a long-term perspective. It’s called Dollar-Cost Averaging (DCA).
Dollar-Cost averaging (DCA) is a wealth-building strategy that involves investing a fixed amount of money at regular intervals over a long period. This type of systematic investment program may be familiar to investors with 401(k) and 403(b) retirement plans. The concept is the same: Every paycheck adds the same amount to your retirement account whether the market is going up or down.
James Mcwhinney, Investopedia
Let us assume an investor has a working capital of $5000. Each month he invests $1,000 into Bitcoin. Over a period of five months, the share price of Bitcoin is:
- Month 1: $2000
- Month 2: $1600
- Month 3: $1200
- Month 4: $1700
- Month 5: $2300
Each month, if he invests $1,000, he can buy a number of shares equal to $1,000 divided by the price.
- Month 1 = $1,000 / $2000 = 0.50 BTC
- Month 2 = $1,000 / $1600 = 0.625 BTC
- Month 3 = $1,000 / $1200 = 0.83 BTC
- Month 4 = $1,000 / $1700 = 0.58 BTC
- Month 5 = $1,000 / $2300 = 0.43 BTC
The total number of shares the investor purchased was 2.965 BTC and the average price was 1760. Taking into account that the current price is $2300 now the original investment has grown into 2.965 x 2300 = $6819.5.
If he had invested the $5000 in the first month, he would have $5000/$2000 = 2.5 BTC, which is less than what he could have earned if he applied the DCA on the previous example. But what if he would’ve saved his $5000 for the third month. Then he would’ve had $5000/$1200 = 4.16 BTC, this is way more. But there is a major flaw here; no one can fully predict the market. Theres no way this guy could have guessed that the lowest price was 1200. This is very unlikely to happen even to professional traders.
Dollar-Cost Averaging is a strategy that doesn’t care about the actual price or future direction of the market. It’s focus lies in the average price per share. Dividing the investment reduces the risk to ensure an overall profit. The investor is essentially buying at the average price. If he buys higher or lower, then the operation becomes very risky.
Keep in mind that the strategy is for long-term only. It won’t work on a short term time frame. So I would recommend a period of 2 or 3 years minimum.
The way to start doing this is very simple. Let’s say you have a job, you want to invest and save money.
- Take a healthy sum of money from your paycheck, something small like 10%.
- Establish a time frame
- Determine a target asset to buy
- Stick to the schedule
This has worked for me in the past so I’m making a suggestion to you, the retail investor. Do your own research and reach your own conclusions. Let me know in the comments what do you think.