Accumulating Wealth with Dollar-Cost Averaging

Written by BTSE

June 12, 2020

Accumulating Wealth with Dollar-Cost Averaging
written by @veriphibtc

Bitcoin accumulation strategies are dependent on the extent of one’s knowledge in a field, such as trading, or the amount of capital at hand to take on larger operations, such as mining.

Both of the above are feasible when one puts forth the practice and resources to undertake them effectively. Alternatively, one could receive payments in bitcoin in exchange for goods or services. Being paid in Bitcoin is definitely an awesome experience, although the number of employers or retail shoppers willing to pay this way can be limited.

A good addition to the methods mentioned above is to regularly dedicate a portion of your money to buying bitcoin. This is known as Dollar-Cost Averaging (DCA), and it is an excellent tool in your wealth accumulation toolkit.


What Is Dollar Cost Averaging (DCA)?

We’re not all necessarily hardened traders. Analyzing trends in the market and its underlying assets is no easy feat. It could take time before you get a grasp of technical analysis (and your emotions) when faced with tumultuous market conditions.

For traders and non-traders alike, exploring the idea of Dollar Cost Averaging may be a good idea. Traders can have a set amount of capital allocated to growing their stack, while still constantly building upon a DCA’d “long-term” stash of coins.

By using DCA, all you have to do is decide a dollar amount and time interval with which you will buy Bitcoin. Example: $200 on the first of every month, $50 every week on a specific day, or $10 every day at a specific time. By choosing an amount and interval and not deviating from this plan, you remove all emotion from your decision-making. If the market is low, you pick up more Bitcoin with the same dollar amount. If the market is high, you’ll buy slightly less with your funds. Over time you’ll catch some spikes and dips, but your stash of Bitcoin will continue to grow in size.

Essentially, you just set it and forget it. No need to stress about volatility, since you’ll be building up your wealth slowly, but surely. This is a great strategy for increasing bitcoin holdings without worrying about what’s going on in the market.


Why Should I Use DCA?

Dollar-cost averaging is beneficial for those seeking to implement a long-term strategy when it comes to investing in Bitcoin. You will only be spending the amount that you dedicated to your strategy in advance, so you’ll be less vulnerable to making buying decisions based on an emotional reaction, like FOMO (fear of missing out).

This is also a favorable solution for smoothing out the swings we often face in Bitcoin. Bitcoin has been known to fluctuate in price, and at some moments these fluctuations have been quite considerable. However, over long enough timeframes, Bitcoin has continued to grow. This means that by dollar-cost averaging, you end up minimizing the risk inherent in Bitcoin’s volatility.

Always spending a fixed amount of money means that you’ll accumulate more bitcoin during downturns and less during bull runs. Doing this reduces the downside risk of placing larger sums in one go, since timing the market is not everyone’s forte. So far, using DCA has been an effective long-term strategy to accumulate bitcoin and generate a positive return, all the while reducing the hassle that investing can represent for some. Below you’ll see the results from buying $10 worth of bitcoin a week for the past 3 years. It almost doubled the amount invested! To calculate DCA returns, you can use this great tool developed by dcaBTC.

DCA is not to be confused with rebalancing. The latter is a process in which you reallocate your assets by buying or selling on a periodic basis to maintain desired asset weights or riskiness in a portfolio. DCA can on the other hand help reduce the necessity for rebalancing when managing your portfolio.


How do I go about using DCA?

The first step is determining how much you’re willing to dedicate to your bitcoin purchases. This can be a fixed percentage of every paycheck you earn or a lump sum investment that will be gradually scaled in over time.

Once you know how much you set aside, you must decide on the recurring amount you’ll be spending and the frequency of your purchases. This purchasing schedule can be hourly, daily, weekly, or monthly – it depends on what your objectives are and what solutions are available to you.

When deciding on amounts/intervals, keep in mind that smaller amounts done more frequently over a long time period will give you a greater variety of prices at which you scale in – effectively averaging out your purchases more. When buying larger lump sums less frequently over a long time period, there is a chance you may be buying on a spike or dip, meaning you are more at the mercy of volatility.

For long-term holdings via DCA, it is of course prudent to store your coins securely, preferably on a hardware wallet like a Coldcard, Ledger, or Trezor. You can withdraw funds to cold storage at your discretion, either after each purchase, or when you reach certain levels of accumulation.

Now all you have to do is sit back and stack peacefully! DCA is a great tool for simplifying your life when it comes to purchasing and accumulating bitcoin.


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Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.

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