Ask Dr. Bitcoin: What is Dollar Cost Averaging?

DrBitcoinHeader800x465The typical cryptocurrency enthusiast goes through a few steps as they continue their journey, particularly if they see any early gains with their crypto investments.

  1. Initially, they’ll put in some sum of money – usually small – into a cryptocurrency and see some amount of gains and get excited. They’ll either be excited by the gains themselves, or they’ll be excited by the process of learning how easy it is to do (compared to the mountain of challenges one has to go through in a more traditional investing situation).
  2. Subsequently, if they’ve invested via an exchange, they may try their hand at day trading. If they invested by buying from someone in person, they’ll watch the price of the coin several times a day, perhaps obsessively with a dedicated screen, rejoicing and decrying minute moves in the market.
  3. After burning out on watching the market obsessively, they settle on either buying and holding (and putting their head in the sand on price), or taking a measured approach to watching the price on a periodic basis.

I know this is the journey I took – and my third step included a detail that has become common amongst advanced bitcoin users: buy-and-replace.

Essentially, using a constellation of tools that allow me to easily buy and spend my bitcoin, I kept a relatively stable amount of bitcoin in my account by buying goods and services with BTC and then immediately re-buying that same amount. As I grew more comfortable with holding large amounts of money in bitcoin regardless of what the price per bitcoin was, I added another step to this – I’d buy-and-replace, but when I replaced, I’d buy whatever I spent plus an additional 10%.

Screenshot 2016-08-15 at 9.10.55 PMOver the first year or so of doing this, I noticed that the amount of bitcoin I held grew rather quickly as compared to years past, as did the total value of the amount – which was particularly interesting considering that it was a bear year (that is a year where the price on average decreased over the course of the year).

I thought I had stumbled onto something unique, but my larger-than-expected gains were due to a time-worn technique called Dollar Cost Averaging (DCA). Dollar cost averaging is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. The investor purchases more shares when prices are low and fewer shares when prices are high. The end result is that a disciplined investor can spend a sum of money spread out over time in a fluctuating market and net more value than investing a lump sum of the same amount.

I invited one of my friends (as well as my family’s financial adviser) David Salmon of Primerica over to the offices better explain the concept using a couple of analogies he uses when asked about the concept. He uses two stories to help explain it that are particularly illustrative, and can likely help you formulate an investment strategy of your own that will help you take advantage of fluctuations in the markets that will allow you to not sweat the small (and large) market changes that are all-too-common to cryptocurrency.

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