2 of the largest cryptocurrency investors in the world are dollar cost averaging in Bitcoin. You should?

Despite the epic cryptocurrency market crash, two of the world’s largest cryptocurrency investors are doubling down on their crypto bets. On November 16, the president of El Salvador, Nayib Bukele, announced that the country of him would buy one bitcoins (BTC -4.25%) per day, every day, starting November 17th. Almost immediately after, cryptocurrency entrepreneur Justin Sun announced that he would adopt the same Bitcoin strategy.

This Bitcoin strategy is, frankly, the best way to convert dollar cost average into cryptocurrencies. Both investors pledge to buy Bitcoin every day, at roughly the same dollar amount, regardless of market conditions. And both are adding to Bitcoin’s already massive holdings. El Salvador, for example, has already invested more than $100 million in Bitcoin. So is this type of strategy right for the average investor?

Advantages of dollar cost averaging

Dollar-cost averaging has already proven to be a successful strategy with equity investors, and mounting evidence suggests that a dollar-cost averaging strategy could be successful for Bitcoin investors. In a standard dollar-cost averaging strategy, you invest the same preset amount on a regular basis (such as weekly or monthly), regardless of market conditions. This removes the excitement from investing and eliminates the dangers of trying to time the market. Instead of worrying about the daily ups and downs, investors continue to buy regularly.

Image source: Getty Images.

Another benefit of dollar-cost averaging is that you end up paying less for an investment (in dollar terms) over the long term because you’re buying when prices are both rising and falling. You can see it immediately with El Salvador and its Bitcoin strategy. Going into its new dollar-cost averaging strategy, for example, El Salvador had purchased a total of 2,381 Bitcoins at an average price of $43,357.

The average price is so high because El Salvador started buying Bitcoin in September 2021, right around the time Bitcoin was hitting all-time highs. Now that El Salvador is buying Bitcoin at a price below $20,000, this average cost will continue to decline over time until Bitcoin regains its previous all-time highs.

How to convert the cost average in dollars to Bitcoin

While most retail investors can’t buy $20,000 worth of Bitcoin every day, they can certainly adopt a modified strategy, such as $50 a week or $200 a month. With dollar cost averaging, there are numerous ways to adjust the parameters. For example, it could be argued that both Bukele and Sun are adopting a “modified” dollar-cost averaging strategy. Instead of committing to a fixed daily amount, they are committing to an amount that will allow them to buy an entire Bitcoin. Since Bitcoin is currently trading around $16,500, some days they might invest $16,000 and other days they might invest $17,000.

Of course, you’ll need to tailor your strategy to your specific investment and financial goals. As a general rule, the most popular dollar-cost averaging strategies are monthly rather than weekly or daily. This helps reduce trading fees and also eliminates any temptation to time the market. Dollar cost averaging can very quickly become a set it and forget it strategy, especially if you automate your monthly investment allocation.

Average dollar cost in action

Using widely available websites, you can see how any dollar-cost-per-Bitcoin averaging strategy would perform over a specific time frame. On many sites, you can adjust parameters such as how much you’re investing, the regularity of your investment, and the time frame of your dollar-cost averaging strategy.

For argument’s sake, let’s say you started investing $100 a month in Bitcoin a year ago, around the same time El Salvador started buying Bitcoin on the market. Your $1,200 investment would now be worth $1,150, a 4.17% drop in market value. That might be depressing to some, but it’s certainly better than the 62% decline El Salvador reported in its Bitcoin position. Dollar cost averaging is no guarantee that you will make money on your investment, just that the pain will be much less palpable if the market crashes.

Should I convert the dollar cost average to Bitcoin?

Keeping in mind the enormous volatility and risk involved in investing in cryptocurrencies, a dollar-cost averaging strategy can be an effective way to gain exposure to Bitcoin without taking excessive risk. As seen in the example above, if you averaged the dollar cost of Bitcoin over the last year, you’d be pretty much even right now. You would not panic about the market and know that your long-term gains will look very impressive if Bitcoin recovers. This may explain why two of the world’s largest cryptocurrency investors are now dollar-averaging the cost of Bitcoin.

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