I used to have a buddy in college that was so damn serious about everything it was annoying. We used to be sitting around drinking Natti Light straight out of the kegerator, you heard that right ladies an entire keg of Natti Light on tap all the time, and our roommate would walk in all serious and we’d stand up and say “Stocks and Bonds, Stocks and Bonds” just giving him a hard time. He’d always laugh it off because he knew it was in good fun, he was actually a blast to be around when he lightened up. The reason I bring it up is because when we think of investing we often think of men and women in suites, with fancy degrees, and a kill or be killed mentality like Gordan Gekko from the Movie Wall Street. Everyone is so damn serious all the time, thats the only way to make money right?
As it turn out, investing is not like a 1980’s movie. You don’t need a killer mentality to do well in the markets, in fact, in 2020 you don’t even need a suite. Over the past couple of decades Wall Street and investing for that matter has shifted away from brokers and a street in New York to average people sitting on their computers in the comfort of the their homes or at a local coffee shop or co-working space. This shift has created unprecedented opportunity for the average guy and gal who has chosen to educate themselves on how investing works. What I’d like to do in this article is give you a simple strategy you can implement today that will allow you to participate in any market without betting the house. This is something I have used for years in both the traditional markets and more recently in the Bitcoin and Cryptocurrency markets. The strategy is called Dollar Cost Averaging.
Dollar Cost Averaging is an extremely simple and affective way to gain exposure to an asset you believe will appreciate in value without taking too much risk in any one trade. It works like this: Say I want to start investing in Bitcoin but I am terrified that the price is going to drop the second I buy it. It is an EXTREMELY volatile asset so chances are that you would be right, it will drop at some point after you buy it. Say you have $5,000 that you are looking to allocate to Bitcoin. There are many ways in which you could decide to allocate that money but if you were concerned about the day to day or week to week price action of the asset, and believed that over time the asset would appreciate in value, you could simply Dollar Cost Average your way into a full position.
The easiest way to do it is go to Coinbase and set up whats called a recurring purchase. This will allow you to set the date and time you want to purchase Bitcoin or any other digital asset listed on the exchange. For example, for the past few years I have been buying the same dollar amount of Bitcoin every Friday morning like clockwork. The reason we would want to do this is twofold: The first reason is psychological, I don’t worry about missing a big run up in price if I know that I have exposure to the asset. Take your $5000 you have to allocate, if over the past couple of months you had been buying $250 of bitcoin every Friday and the price shot up, you would be less likely to FOMO (Fear of Missing Out) into a losing position by buying at the top of a run. Vice Versa, if the price drops unexpectedly out of nowhere (which it will because, well thats what Bitcoin does) you aren’t fully exposed to the asset and as a matter of fact, you will actually be excited to see the price drop because you will be able to afford more Bitcoin with your weekly purchase. So many people make the mistake of thinking they have to go all in at once or they will miss the big rally. Investing, in particular Bitcoin investing, is mostly psychological. If you can manage your emotions by Dollar Cost Averaging into a position, you will be able to sustain the massive fluctuation in price.
The second reason is just Math. Once you have been around the Bitcoin market long enough you learn that up to this point, it has operated in cycles, much like the stock market does. However, these cycles revolving around Bitcoin’s supply and demand structure. Approximately every 4 years Bitcoin’s supply is cut in half by an event called the halvening. (This is an entirely different subject that we can cover in another article, for now just now that the amount of Bitcoin available to the market gets cut in half every 4 years.) What this in effect does is lead to supply side shock as the market inevitably prices in the supply 6–18 months after the halvening. The long and short of this is that as a result, the price of Bitcoin will surge and pullback at somewhat predictable time points. (This is true of the past and may or may not continue so just be aware of that fact.) Instead of trying to time exactly when this is going to happen, if you have a Dollar Cost Average approach, you can fill your position over time at a cost basis that won’t make you cringe if the price of Bitcoin falls 80%. For example I started purchasing Bitcoin at $500 and I have continued to purchase the same amount every Friday all the way up through $20,000, down to $3,200 and back up to $10,000. As a result my overall position, despite having bought at the peak, is now much much lower than the price of Bitcoin sits currently today. The goal here is to accumulate as much Bitcoin, or stock of your choice, as possible and because we have no way of seeing the future, Dollar Cost Averaging allows us to do this in a risk adjusted way.
This strategy, in my opinion, is the best way to get started investing in Bitcoin, or for the matter the stock market as well. Just remember with Bitcoin, you don’t need to buy a full Bitcoin to get started! You can start by buying as little as $10 a week just to get a feel for the space…remember though, you must believe that over time the asset will appreciate in value. This is not a get rich quick investment strategy. You will be amazed however, even investing a small amount every week, with how quickly your portfolio can grow in size with this method.
All the Best.
