If you have invested in Bitcoin and frequently discuss it, you may have observed that questions occur from time to time, particularly during Bitcoin bull markets. They can be asked by your best friend, grandmother, taxi driver, or anyone else.
Should I purchase Bitcoin right now? Is it a good time to invest in Bitcoin? Is this a reasonable price to pay for Bitcoin?
In this post, I will attempt to provide the most accurate answers to the points raised above.
Why Should (and Shouldn’t) You Buy Bitcoin?
The above questions are concerning Bitcoin investment, but they should be asked regarding any sort of investment. If you decide to purchase Bitcoin, you should understand why you are doing so and when (at what price) you should do so.
Any investment, particularly one as risky as Bitcoin, should be familiar to the investor. The majority of investors now hold Bitcoin rather than using it as a payment method.
What distinguishes Bitcoin? Who has authority over Bitcoin and its value? How many bitcoins exist, and how many will ever exist? What motivated the creation of Bitcoin? How do you keep Bitcoin and other cryptocurrencies safe?
If you can’t answer one or more of the above questions, you should start researching what Bitcoin is.
Later in this post, we’ll talk about when to acquire Bitcoin and whether now is a good time to invest.
Bitcoin as an Investment: What to Know Before You Buy
The most important thing to understand about Bitcoin and other cryptocurrencies is that they are speculative investments. If stocks and equities are the riskiest traditional investments, then Bitcoin has its own risk category, and guess what? A risky asset is one whose price increases by 2,000% in one year (2017) and then drops by 70% the following year (2018).
The ROI shown above demonstrates how fickle Bitcoin is. Imagine you bought Bitcoin for nearly $20K and were left with what was left of it the following year — a little more than $3K. (Does this sound familiar?)
When investing, you should constantly consider both eventualities, especially the worst-case scenario. The worst-case scenario for Bitcoin is that it reaches zero.
You should be sure that you can handle it before selecting whether or not to buy. And if losing 90% of your initial investment seems excessive, you should surely cut that amount.
Is Bitcoin Headed to Zero or $1 Million?
Unlike stocks and bonds, where you just call your broker to purchase or sell, you are your own bank with Bitcoin.
You should educate yourself on how to keep your Bitcoin and how to send Bitcoin so that you can transfer it from the exchange to your digital wallet. Because most people do not have the time or skill to learn these fundamentals, buying and trading Bitcoin on a regular basis is not a viable alternative.
This gets me to my proposal that you treat Bitcoin as if it will be worth $1 million or $0 in 10-20 years. Now consider the following: Would you rather leave the game? Do you want your children to question you, “Daddy, why didn’t you buy Bitcoin when it was so cheap?”
After that, consider how you would feel if the worst-case situation occurs: Bitcoin’s price goes to zero and you lose everything (or that Bitcoin equals something, but somehow you lost access to your coins).
How Effective is the Dollar Cost Averaging Strategy For Buying Bitcoin?
You are not a wizard who knows when to purchase and sell. I’m not either. To put it another way, we can’t time the market. As a result, intelligent thinkers devised the DCA method.
Dollar Cost Averaging (DCA) is a strategy for accumulating funds that involves dividing your total desired purchase price into equal-sized pieces at regular time intervals. This can be done once a week, once a month, once a quarter, or whenever is most convenient for you.
The main benefit of employing this strategy is that you will be less concerned about the purchase price than you would otherwise be. DCAing is ideal for long-term investments, and it is especially recommended for volatile assets like Bitcoin, because the purchase price is averaged over time.
Another advantage of this strategy is that it is ideal for continual investment, such as investing a little amount of one’s monthly salary.
Bitcoin is unique in that, unlike stocks and shares, it may be purchased for any quantity of fiat currency. Everyone has enough satoshis (0.00000001 Bitcoin) and there is no minimum purchasing requirement.
The DCA approach has the disadvantage of not maximizing earnings in bull market situations. However, there have been several occasions in history when DCAing in the US stock market produced a bigger profit than a single sum investment.
Another potential downside is the perseverance required to purchase a certain quantity of Bitcoin over time, even if you’re feeling like the market is at an absolute bottom and it’s very tempting to buy more, or vice versa.
DCA’s Surprising Results: Over 1000% in 5 Years
If you had spent just $1 on Bitcoin every day for the previous nine years, you would have $18,000,000 today. That’s simple, because Bitcoin was selling for several dollars in its early days in 2011 and 2012.
Let us now look at some more realistic examples:
Let’s meet Joe. Joe earns $5,000 each month in net pay. Assume that 5% of his pay has been set out to purchase Bitcoin once a month since he first heard about it around the end of 2016. Investing $250 in Bitcoin every month for just three years would have yielded a profit of $18,300, or a 203% ROI.
Joe would have generated a profit of $171,650 if he had been lucky and had done so for the past five years, a 1,077% ROI.
Consider 2018 – 2019, taking in mind Bitcoin’s catastrophic year in 2018. Joe would still have made $1,166, a 29.5% ROI. Aside: If unlucky Joe had made a lump sum investment in December 2017, just before to Bitcoin’s all-time high, he would have lost roughly half of his investment by 2019. This, by the way, was the story of many Bitcoin investors who joined the train at the height of the Bitcoin boom in 2017.
Joe would have made $1,700 if he had started buying $250 worth of Bitcoin per month a year ago, which is an ROI of 57%.
The moral of the tale is that the earlier you use a DCA plan, the higher your ROI, because the risk of purchasing at a relatively high price (like at the end of 2017) is reduced with time. DCAing enables you to average down your buying price.
DCAing isn’t just for Bitcoin. If you had bought a Nasdaq ETF every month for $50, but you had timed the market horribly and began investing just when the Nasdaq reached its all-time high at the height of the dot-com bubble, you would have received a 114% ROI after 15 years (5.2% annually).
An analysis of historical Bitcoin price data conducted in collaboration with Bitrated Founder Nadav Ivgi yielded some intriguing results. The study used exchange data from 2010, when Bitcoin was valued less than a dollar, until the end of 2016 (when the price had dropped by more than 70% from a high of roughly $1,180 in 2013.) We purposefully excluded data from 2009, when Bitcoin was just worth a few pennies.
Surprisingly, the analysis discovered that a dollar cost averaging investment strategy yielded a positive ROI throughout the majority of time periods. In fact, DCAing for at least 2.5 years guaranteed a positive ROI 100% of the time – even for individuals who purchased Bitcoin in late 2013, around its high of $1,180.
The bottom line: Between August 2010 and December 2016, dollar cost averaging into Bitcoin yielded a whopping 58,685% return on investment (ROI).
Explanation of the Data Presented Above
Each square in the figure reflects an investment period ranging from August 2010 to December 2016, with a minimum of six months. Each square’s color symbolizes the ROI: green signifies a positive return, while red represents a negative return. The leftmost square on the top line indicates the first measurable period of fixed daily investments (August 2010 to February 2011).
Each line symbolizes a new month, and each square represents a different month. The second square on the top row, for example, indicates the return on investment between August 2010 and March 2011. The return between September 2010 and March 2011 is represented by the first square in the second row.
The greatest concentration of red squares corresponds to late 2013 and early 2014, when the price of Bitcoin reached an all-time high that was not surpassed until the beginning of 2017.
Conclusion
To summarize, the DCA investing approach is ideal for long-term Bitcoin investment. Because Bitcoin’s supply is restricted, it is expected to appreciate in value over time. Nobody knows for certain if this is a good moment to buy or if the price is too high. That is why dollar cost averaging works so well.
