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Dollar-Cost Averaging Strategy in Crypto Investing – Does it Even Work?

We’re all aware of Mutual Funds SIP’s or Recurring Deposits in India, right? What I’ll try to explain in today’s article is an investment technique that has proven to give insane results over time. All it needs is patience and disciple in investing. The framework behind most of our monthly investments and savings is Dollar-Cost Averaging (DCA) in simple words. But wait, don’t get confused. I’ll also explain how anyone can use the same technique for investing in Crypto Assets as well.

DCA can even lead to your Financial Freedom!

So, before I start let’s take a few examples to understand this even better. Why should one even care for spreading out his investment timings? Not many of us could even prefer to put in a lump sum amount at once. Dollar-Cost Averaging is a strategy that dilutes the volatility & risk of an asset/equity by making one buy-in parts at regular intervals. Another advantage of DCA is that it doesn’t require you to time the market in order to buy the asset or equity at the lowest possible price. You don’t need to be an expert before you start to invest using DCA.

Crucial Points to Remember

  • DCA works in the hope that the price of the asset will keep growing over time in the future.
  • Also, investors should consistently keep buying every month on the exact date irrespective of the price that day.
  • It also helps to avoid the risks involved in a lump-sum investment.
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Real World Examples of DCA

We all have heard of big-pension funds in India, right? Today we even have a National Pension Scheme (NPS) in India which any individual can subscribe to. The concept of investments in NPS is exactly what you might have guessed already. You can start investing a fixed amount every month and let that amount compound over time. Once the investor turns 60 years old, he/she gets a lump sum payout & monthly income. I’ll explain more of this in a bit.

Now let’s take the example of Bitcoin. This could be very well stated that Bitcoin is by far the riskiest asset for any traditional stock market investor. The volatility of Bitcoin is way more than expected for people who are reading this might have ever experienced. Even if you think you’ll be in for the long-term game, let me share what happened to me when I started.

The moment I saw a price drop of more than 10%, my reaction was to panic sell. I started with an investment of Rs 50,000 and the very next week or two, it dropped to Rs 33,000. My instant reaction was to sell and stop myself from having further loss but I didn’t sell my Bitcoins. Instead, I kept them for more than 2-3 months and booked a profit of around Rs 17,000. That was probably the only event when I actually sold my Bitcoin. Anyways, you get the idea about risk with a lumpsum investment. I was able to hold my asset because the money I invested was not my emergency fund. If there had been an urgent need for cash, for any other person he/she would have suffered a loss of around 40%.

You can be stress free !

Dollar-Cost Averaging saves you from price fluctuations. You will not need to worry about impermanent losses, that is because by investing the same amount every month, you’ll automatically buy less when prices are high and buy more when prices dip.

If you look outside of Bitcoin, traditional Index Fund investments also work the exact same way. In an Index Fund, you can set up an auto-debit mandate with your bank account and start automatic monthly investments without doing much market research. Nobody needs to be an expert in market trading to start their investment journey towards any equity or stocks.

For Bitcoin, I found this calculator on WazirX Blog which you can use to view your projected ROI if you keep investing as low as Rs 1000 per month. Normally, you can expect around a 30% rate of return on Bitcoin today. You can get your projected return by filling up the necessary details.

The reason why this works is really simple. Things start to compound over a longer time frame. I’ve made this chart for a better understanding of how your wealth could start compounding over the next 10-15 years.

  • You start investing $100 every month into Bitcoin without even thinking about its price that day.
  • Then you keep repeating the same for next 15 years. Every month on x day, I’ll drop $100 into Bitcoin.

Assuming an average of 30% +- 5% for the next 15 years APY, check where things will go.

YearsVariance Above (35.00%)Future Value (30.00%)Variance Below (25.00%)
Year 0$0.00$0.00$0.00
Year 1$1,200.00$1,200.00$1,200.00
Year 2$2,820.00$2,760.00$2,700.00
Year 3$5,007.00$4,788.00$4,575.00
Year 4$7,959.45$7,424.40$6,918.75
Year 5$11,945.26$10,851.72$9,848.44
Year 6$17,326.10$15,307.24$13,510.55
Year 7$24,590.23$21,099.41$18,088.18
Year 8$34,396.81$28,629.23$23,810.23
Year 9$47,635.70$38,418.00$30,962.79
Year 10$65,508.19$51,143.40$39,903.48
Year 11$89,636.06$67,686.42$51,079.35
Year 12$122,208.68$89,192.34$65,049.19
Year 13$166,181.72$117,150.04$82,511.49
Year 14$225,545.32$153,495.06$104,339.36
Year 15$305,686.18$200,743.57$131,624.21

Be Cautious of where you start from

  • Since you’re playing a long-term game be extra cautious while choosing your preferred exchange. I never play around with my money and I prefer to pick the global leaders by trading volume to safe keep my funds.
  • Another thing to remember is avoiding short-term games. These are financial traps according to me which can make or break things for your future. Don’t play around with random shitcoins promising insane value for your investment. Avoid gambling with money altogether.
  • Since none of us are expert investors, our job isn’t tracking our investments every day. Acquiring side skills has always been a priority for me. Don’t be that guy who did everything he/she could to trade and lose it all in the end.
  • Never compare your returns with someone else’s. In the end, we all are different and our aims are different with money as well.

In the very end, this was not a piece of financial advice. These are the strategies that I’m following right now. While writing this, I’m 19 years old and will be turning 20 later this year. I believe my investing horizon is much larger than people who are in their late 30s or 40s. This could work for me but not for others. You should only do what you’re comfortable with for sleeping at night without stress.

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