Dollar cost averaging can be a good viable way to invest in bitcoin and cryptocurrencies in general. But due to the extreme volatility of cryptocurrencies it should not be done blindly. But with a few tweaks it is a good way for people with long time frames on their investments to maximise profits as well as take some of the stress out of “buy-ins”. Dollar cost averaging bitcoin and cryptocurrencies can be a very good strategy for newcomers to the crypto-investment space.

First the Wikipedia definition of “dollar cost averaging”:

Dollar cost averaging (DCA) is an investment strategy with the goal of reducing the impact of volatility on large purchases of financial assets such as equities.

Dollar cost averaging is meant to smoothen out the ups and downs of assets as you buy in smaller amounts of the assets each period instead of buying all up front.

Dollar cost averaging bitcoin serves a few valuable purposes and is in my opinion especially valuable with cryptocurrencies but let us start with explaining the “normal” reasoning behind it; capping volatility.

If assets rose linearly dollar cost averaging would be a bad tactic. You would be better of buying as much as possible when you could and then let those assets rise over time until the end where you would be on your luxury yacht smoking cigars and living happily ever after.

But most assets do not rise linearly they — shock — horror — actually fall as well. This would not be that much of a problem if only we knew when they would fall and where the bottom would be. But again — we do not.

If you buy 10 assets at value 100 you just spent 1000 — yes I know — impressive stuff — thanks for the clapping!

If these 10 assets rise linearly 10% over a year you end up with 1100 — yes still impressive I know. But as most assets go up and down in value you might as well have an asset that had fallen 10% in value and therefore lost money.

But as assets rarely rise linearly a 10% increase over a year may have included drops of 15–20% as well as rises of 15–20%. A graph of most interesting high-yield assets will look a lot like drawings from a 5 yo. Lots of curves and not many absolute straights.

If you dollar cost average you can actually “gain” from losses of value as you can then get more assets for a lower price. Yes the assets you already bought has also decreased in value, but as you buy in smaller amounts the loss will be mitigated. You may only have lost 10% of a single assets that initially was worth 100 but now they only cost 90 so you get 1.1 asset for your 100 value investment.

As Wikipedia continues in the definition:

Dollar cost averaging is not always the most profitable way to invest a large sum, but it is alleged to minimize downside risk.

And if there is something you really want to do when investing in cryptocurrencies it is minimizing downside risk. As stated earlier, if we had full control over the market and knew when the highs and lows would occur investing would be easy. But we do not.

Cryptocurrencies fluctuates like nothing else. It is irrational mob mentality on speed. You can be lucky as hell and gain 50–100% overnight but you might as well have lost it. So letting go of a bit of potential upside gain to cap downside risk is worth it.

The second point with dollar cost averaging is also related to market fluctuation but not tied to capital gains or losses, but more the psychology behind it.

If everything goes according to plan and your investment just rises day after day, then investing is easy. Yes you can then regret that you did not invest a larger amount, but the stress of that scenario is nowhere close to the scenario of having invested a lot of money into an asset to only see it drop in value day after day, after day… You will most likely sell at a loss, hope to buy in at a lower price to only see it rise again the moment after you sold so you lose even more buying in at a higher price to see it fall again. You will check your asset over and over again unable to focus on anything else than your investment and be a total pain to be around.

This is the pressure of investment. It plays on all the strings of our reptile brain and can really cause a lot of stress. The stress of course only goes up if you are to invest a very large sum of money. But intelligent as you are you probably aslo already figured that this is where dollar cost averaging bitcoin and cryptocurrencies can make a difference. Not that investing smaller amounts totally keeps you from feeling the stress of trying to game the market. But you then know that you are not betting all your money on this one shot, you may have some unfortunate buy-ins but they will smooth out over time and you will have some that seems to be quite lucky punches.

Dollar cost averaging is also obvious/what you automatically do, if you do not have a large sum of money that you can invest, but instead have a set amount every month that you invest. Dollar cost averaging in its most basic form could even be done totally automaticly — but at least for investing in bitcoin and crypto currencies in general, I would advise against it.

The primary reason for arguing against blindly/autonomously doing dollar cost averaging and just invest a set amount on a specific time each month/week is to do with the extreme fluctuations of the crypto currency market.

You cannot game it 100% and you will never do so, but on the other hand there are no reasons to just blindly invest if markets are clearly bleeding. A better strategy is to transfer a set amount to the exchange each month so you know that you have funds ready to invest when a “good enough” opportunity comes your way.

Setting aside a few days timeframe and investing in a “period low” instead of trying to do a close to “all time low” usually works quite well. Trying to find the “all time low” sets you up for analysis paralysis and probably only results in you having invested nothing at all.

If you have the stomach for it — sure wait for what seems like all time lows and bet everything. But for most mortals they won’t be lucky enough to find those and could have had 10–30% returns if only they had invested smaller amounts when they weren’t really sure.

Dollar cost averaging bitcoin and cryptocurrencies therefore serves a few purposes.

  • Trying to smooth out the extreme fluctuations — keeping you from losing a lot on buy-ins at unfortunate times.
  • Keeping your reptile brain from tying a Windsor knot trying to game the market
  • Giving you money each week/month/whatever that you can then invest when a “good enough” opportnity comes your way.

You aren’t betting everything on one magical buy-in so you can afford to be wrong.

As a final note. Please do not invest anything that you can not only afford to lose especially not in bitcoins or cryptocurrencies. Intelligent superstar investors are notoriously famous for avoiding downside risks. Yes they have invested a lot of money into risky investments to really take off but rest assured that they did so while also capping their exposure and downside risk.

One of the questions that comes up when investing in cryptocurrencies is whether to only invest in bitcoin or spread your investment over different currencies? Someone even send me this fun statement:

Friends don’t let friends invest in alt-coins

While catchy and fun and perhaps even somewhat good advice given the latest crazy rise of bitcoin it can of course be debated. And if you should choose others — then which should you choose? Is spreading your investment out over different cryptocurrencies even considered spreading of risk or are they so interconnected that it somewhat defeats the purpose?

They are all good questions but also all questions for another time. So please subscribe or stick around if you want answers to those questions as well as more input on the psychology of investing in bitcoin and cryptocurrencies.