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As a general rule, we assume that the best strategy when investing is to buy low and sell high. Under ideal circumstances, we should buy close to the low and then sell close to the high. So investing primarily means finding the best time to buy and the best time to sell. The person who bought Bitcoin in December 2017 and sold it a year later is seen as an unfortunate investor. But we think differently for an investor who bought in 2018 and sold yesterday.
So it all comes down to two decisions. The decision to buy at a certain time. And the decision to sell at a certain time. It is obviously not easy to make this decision with a volatile asset like Bitcoin. As of December 2017, optimism was skyrocketing and few predicted the long bear season ahead of us. Many of these investors have had to wait nearly 3 years for a return of 0. Those who bought at $ 14,000 3 years ago can now recoup their initial investment. But those who bought for $ 19K are still waiting. That is, they still have a negative balance.
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Many say that Bitcoin is a very profitable asset, as it was recently at $ 3K and is now at nearly $ 14K. But, How many of us have been lucky enough to buy at least? According to a simple statistic, more investors buy higher than lower. Because greed is in seventh heaven during the bull season and there are many new buyers. In other words, more new buyers entered in 2017 than in 2018. In fact, the bitcoiners who are happy with current prices today are the bitcoiners that bought a lot in 2018, 2019 and Q2 2020. However, we can’t forget those who invested during the big hikes of 2017.
The problem with the low buy and high sell strategy with a volatile asset like Bitcoin is that it’s not always easy to know when Bitcoin is cheap or expensive. If we buy at $ 3K, Bitcoin is expensive today. But if we buy Bitcoin for $ 19K today it’s cheap. But What will happen tomorrow? Because if Bitcoin goes up to $ 20K in the next few months, Bitcoin is cheap. But if it goes down to $ 10,000, it’s expensive. And, since it’s not that easy to know the future of the price, a purchase or sale always ends up being a leap of faith.
Now, the problem is that buying low and selling high is not the best strategy for investing in a volatile asset like Bitcoin. While it’s true that people who buy low and sell high make a lot of money, both of these extremes are easy to identify in hindsight. But it is almost impossible to identify them at the moment.
The best thing in the case of Bitcoin is to use a strategy that works well with volatile assets. Dollar Cost Averaging is my favorite strategy and the one I use for investing. It is perfect for volatile assets.
With this method, the price takes a back seat. The investment follows a predetermined formula and the strategy is mechanically executed. This model eliminates the emotions and the need to predict the price.
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The average dollar cost of Bitcoin consists of buying Bitcoin for the same amount (in dollars) at fixed intervals. For example, $ 100 every Friday. And it works best when the technique is used in conjunction with another technique: the Constant Dollar Plan. This involves buying a little more when Bitcoin is trading well below its average and buying a little less when it is trading well above its average. This is assuming the wallet is split into Bitcoin and fiat. But the fixed amount in the fixed range is always kept.
Let’s see it in practice. Let’s assume we started investing in December 2017. The four Fridays in December gave a total of $ 400 in Bitcoin purchased at different prices. Let’s say we buy on the first Friday at $ 14K, the second at $ 17K, the third at $ 18K, and the fourth at $ 16K. This means we invested $ 400 in $ 16.25K (on average). This means that in the first month of activity we have 0.024615 BTC.
In January, the price continues to drop and we keep buying the same $ 100 every Friday. Of course, at the end of the month the investment is now $ 800 and the average purchase is less. In theory, we have lost money because we no longer have the same $ 800, because the price has dropped. But we are buying at a better price and growing in Bitcoin at a faster rate.
Over the course of 2018, our investment gradually decreased. We invested $ 4800 in total, but bought at different prices. Since this is a bearish year, the averages of purchases made in the first half of the year were higher than those of purchases made in the second quarter of the year. This means that we buy well above $ 10,000, but we also buy well below $ 10,000.
2019 was a mixed year. The year started low and peaked in June, then fell to form an inverted V-shaped year. Hence, the first half neutralized the second in terms of averages.
Then 2020 saw a steep drop in March and we’re much better now. Now, after 3 years, the total investment of our example now stands at $ 15K and the average Bitcoin price is around $ 8,888. Which brings us to an approximate 50% return in three years. That is, an equity of $ 22.5K. Taking December 2017 as a reference, investors who have not used the “Dollar Cost Averaging” method are still negative.
This method doesn’t care so much about Bitcoin’s lows and highs. The average is more important. In fact, looking at the average, Bitcoin’s volatility isn’t that strong. The reason is simple. Bitcoin’s price does not deviate from its average for long. The ups and downs tend to be extremely ephemeral and rare events. The averages, on the other hand, tend to be more permanent and stable.
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The dollar cost averaging strategy is great for the long-term investor. Especially for those who have constant capital to invest. Because it is best to shop weekly or fortnightly. The amount does not have to be very high. The most important thing is to have the discipline to be consistent with your purchases.
Of course, this strategy has a downside. In a bull season, the price tends to improve over time. Which implies that we will buy at a higher price over time. This is a disadvantage in bullish seasons, but becomes an advantage in bearish seasons. That is to say, this strategy works best in the long run. Because what we could lose in a bull season we make up for in a bear season. This allows us to obtain a much more favorable result with a highly volatile asset. Definitely a great option to invest in Bitcoin.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trade move carries risk, you need to do your research when making a decision.
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