The meteoric rise of bitcoin last year has attracted many new investors.
We have heard stories about people throwing their lifelong savings into bitcoin and expect to get rich overnight. But when the price of bitcoin starts to plummet noobs panic and sell at loss.
People mistake bitcoin investment for gambling but just like any other business investment a strategic plan need to be in place to gain profit.
The much hyped concept of buying the lows and selling the highs is impractical because no one can time the market and bitcoin doesn’t usually follow people’s prediction.
Keeping in mind the high volatile nature of bitcoin ,buying bitcoin in one go which is called lump sum isn’t a good approach instead we can implement investment strategy called Dollar Cost Averaging(DCA).
WHAT IS DOLLAR COST AVERAGING?
DCA is an investment technique of buying fixed amount of bitcoin at regular intervals, that way when bitcoin price is expensive you buy less of it and when it’s cheap you buy more of it. By taking this approach, you can “average out” the cost you pay for bitcoin over time.
Let's compare Lump sum and DCA with examples
Lump sum EXAMPLE
Let’s say we want to invest 120,000 USD in bitcoin ON Jan '16
Currently bitcoin is trading at 400 USD per btc so we get 300 btc(120000/400)
By the end of the year, the price increased to 450 USD. In this example, your ROI is 13% (you made 15,000 USD in profit since you owned 300 Bitcoins and the price in Dec ’16 was 450 USD (450 * 300 BTC = 135,000 USD)
DCA EXAMPLE
Lets Invest 10,000 USD worth btc every month over a period of twelve irrespective of price of bitcoin..
So our total investment at the end of twelve months is 120,000 USD
In this scenario, we ended up buying a total of 320.78 Bitcoins, because we consistently bought (and in this example, bought when the price went down).
And now the value of the portfolio at the end of the year would be 320.78 x 450 = 144,352. we have made a profit of 24,352 USD resulting in an ROI of 20% (7% more than the previous case).
With dollar cost averaging, you can reduce market risk and build your Bitcoin investments over time, regardless of where the market is going.
ADVANTAGES OF DCA OVER LUMP SUM OR DAY TRADING
DCA is far less stressful than lump sum or day trading. DCA technique don’t have to watch the charts all the time or set price alarms so they can catch rises and dips.
WHERE DCA IS GENERALLY USED?
DCA strategy is to minimize risk associated with investment of huge amount for longtime.
Its also suitable for highly volatile markets.
WHERE WE CAN BUY BITCOIN USING DCA?
There are a few companies like Coinbase and Blockchain.info, that offer recurring purchases. This means the platform will let you set a desired amount of bitcoin you want to purchase on a set schedule. The service will then deduct funds from your bank account or card listed, and you can acquire bitcoins using the DCA method in a more automated fashion.
On many occasions Warren Buffett who is a famous American business magnate and investor advocated DCA to be a profitable strategy than Lump sum.
In a shareholder meeting Buffett was asked by one investor if he should buy Berkshire, invest in an index fund, or hire a broker.
Buffett delivered with his typical, common-sense rationale:
"We never recommend buying or selling Berkshire. Among the various propositions offered to you, if you invested in a very low cost index fund -- where you don't put the money in at one time, but average in over 10 years -- you'll do better than 90% of people who start investing at the same time."
DCA is suitable for all folk's who are new to bitcoin and want to invest large amount of money for long term without the hassle of spending time studying the market which is at large unpredictable.
Sign up for recurring purchase on Coinbase ,sit back, relax and watching your profit go up with time.
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