With bitcoin running at new all time highs I figured it’s best to help people out on their investing strategy. As we all know people tend to get burned when markets run hot like this, because it’s impossible to time the market which leaves people enduring losses. I have a strategy that I have used for many years now and it’s quite common but people tend to forget this simple rule. This rule that I love is called dollar cost averaging (DCA), this rule divides an investors total amount to be invested across a period of time. This strategy is extremely effective In removing much of the detailed work of attempting to time the market in order to make purchases of and asset at the best prices. Since we are on the topic of bitcoin and it’s definitely the market to be paying attention to, let’s make an example of this strategy executed flawlessly. Lets say an investor is looking to get into the crypto market and they end up buying bitcoin at 40k which is the peak as of today. An investor has $10,000 to invest, they would go ahead and split that $10k up into multiple purchases of bitcoin. Their first purchase was at 40k and they put in $2,500, then the market decides to dip down to 35k. The investor would then make another purchase of $2,500 at 35k…. but then the market dips even further down to 30k. Instead of panicking the savvy investor would make another purchase of $2,500 at this new price point of 30k. Out of nowhere the volatile crypto market dips once again down to 25k, this is where the going gets tough but you must stick to your strategy. The experienced investor now puts his final purchase of $2,500 at 25k per bitcoin. In all the investor has taken his $10k and broke it up into 4 different purchases, reducing his risk of his bitcoin investment. But how? Why is this reducing his risk you may ask…
Well here’s the math behind this method.
Instead of putting his 10k all in at 40k and having the market dip down to 25k which would put him at roughly a 46% drawdown. He reduced his risk by allocating his funds at various price points. We now go ahead and take all his purchases into account …
1st purchase 40,000 2nd purchase 35,000
3rd purchase 30,000 4th purchase 25,000
We will go ahead and find the average now; which all we need to do here is add all these buys together than divide it by 4 since it was 4 purchases he has made.
The grand total when we add it all up is 130,000, next we divide that up by 4 and we will have his average cost of bitcoin.
After dividing it by 4 we get the grand total of 32,500 per bitcoin. So how much did this really reduce his risk? Well we know if he had put all his purchasing power at 40k and the market dipped to 25k he’d be sitting at a 46% draw down, but after dollar cost averaging in his draw down is cut in
HALF! all the way down to 26%!
How is this so? Well because this strategy has made his bitcoin purchase price of $32,500 per coin and then the market dipped to $25,000 per coin the difference between that is only 26%.
This strategy will be very useful in today’s crypto market environment. I hope you guys have found a way you can implement this into your investment strategy and reap the benefits of it.