Bitcoin as a commodity
If you own Bitcoin and talk about it often, chances are you’re getting a lot of similar questions – especially during Bitcoin bull markets. They can come from your best friends, your taxi driver, or even your grandmother.
Should I buy Bitcoin now? Is it a good time to buy Bitcoin? Is this a good price to buy Bitcoin?
Does any of it sound familiar? In this article, we will look into the most accurate answers to those questions, so don’t go anywhere.
All of the above questions relate to buying Bitcoin, but they are relevant for all other investments too. If you decide to buy Bitcoin, you should know why and when to do it.
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Investors should carefully examine all of their investments, especially those as speculative, volatile, and highly risky as Bitcoin. These days, most people hold Bitcoin rather than use it as a payment method.
So, what is it that makes Bitcoin unique? Who controls BTC and its value? How many bitcoins are there, and how many will there ever be? Why was Bitcoin invented? And how do one store Bitcoin and other cryptocurrencies?
If you don’t know how to answer one or more of the above questions, you should start conducting some serious research on what Bitcoin is. You can start with this guide for beginners.
Later in this article, we’ll discuss when to buy Bitcoin and determine whether now is the right time to invest.
The first thing to know about Bitcoin and other cryptocurrencies is that they are speculative investments. If stocks and equities are considered the riskiest of all traditional investments, then Bitcoin constitutes its own category of risk, and guess what?
An asset whose price spikes 2,000% in the year 2017 and plunges 70% the following year is pretty risky. The same can be said about BTC’s price from March 2020 (the COVID crash) until the top reached in November 2021 – it spiked from below $4K to over $69K in a matter of 20 months. And then, it crashed by over 50% in the following two months.
Therefore, you should always keep both scenarios in mind when investing – particularly the worst-case possibility. With Bitcoin – this scenario is that it goes to zero.
Before making a decision, you should be absolutely certain that you can tolerate that kind of risk. If losing 90% of your initial investment sounds like too much for you – consider reducing the amount you intend to buy.
In light of the above – there are many predictions about Bitcoin’s price. On the bullish spectrum – there are some who believe that it will reach $1 million in 10-20 years from now. Ask yourself – do you want your kids to ask you why you didn’t buy BTC when it was affordable? Do you want to be out of this investment?
On the bearish spectrum – some investors believe that it’s going to $0 and completely refute all of Bitcoin’s merits. Are you willing to risk your investment?
If, after all of this, you’re convinced that you want to buy, let’s explore the best way to do so.
You are not a magician who knows when to buy and when to sell. Neither am I. In other words, we can’t time the market. For that reason, wise men invented the DCA method.
Dollar Cost Averaging (DCA) is an accumulation strategy in which you divide your total desired purchase amount into equal-sized portions at regular time intervals. This can be once a week, once a month, once a quarter, or whatever is best for you.
The main advantage of using this method is that you will be less worried about the buying price than you otherwise would be. DCA is perfect for long-term investments, and it is highly recommended for volatile assets such as Bitcoin since one’s purchase price is averaged over time.
Another advantage of this method is that it is very suitable for ongoing investment, such as investing a small portion of one’s salary every month. The nice thing about Bitcoin is that, unlike stocks and equities, it can be bought for any amount of fiat currency. There are enough satoshis (0.00000001 Bitcoin) for everyone, and there is no minimum purchase requirement.
The disadvantage of the DCA method is that one’s profit is not maximized in bull market conditions. However, throughout history, there have been many periods during which DCAing in the US stock market yielded a higher profit than a lump sum investment.
Another potential disadvantage is the persistence required to consistently purchase a fixed amount of Bitcoin over time, even if you feel low and it’s very tempting to buy a larger amount or vice versa.
You are not a fortune-teller who knows when to buy and when to sell. No one is. Perfectly timing the market is next to impossible. For that reason, wise men invented the DCA method.
DCA stands for Dollar Cost Averaging. In simple words, it is an accumulation strategy where you divide your total desired purchase amount into equal-sized portions at regular time intervals. This can be once a week, once a month, once a quarter, or whatever is best for you.
The main advantage of using this method is that you will be less worried about the current price because you will get an average based on all of your purchases. The strategy is perfect for long-term investments, and it is highly recommended for volatile assets such as Bitcoin since the purchase price gets averaged over time.
Another advantage of this method is that it is very suitable for ongoing investments, such as putting a small portion of one’s salary every month. The nice thing about Bitcoin is that, unlike stocks and equities, it can be bought for any amount of fiat currency. And there is no minimum purchase requirement.
The disadvantage of the DCA method is that the profit is not maximized during bull market conditions. However, throughout the history of Wall Street (for example), there have been many periods when a DCA investment yielded a higher profit than a lump sum investment.
Another potential disadvantage is the persistence required to consistently purchase a fixed amount of Bitcoin over time, as it can always be tempting to buy larger amounts.
But to put it into perspective, If you’d bought as little as $1 worth of Bitcoin every day for the past nine years, you would have invested a total of $3,287 dollars in BTC, which would currently be worth around $200K.
Of course, that can seem a bit too good to be true because BTC was trading a lot lower nine years ago. So, let’s have a look at some more realistic examples:
Meet Joe. Joe has a net monthly salary of $5,000. Let’s imagine that he’s decided to invest 5% of this in Bitcoin once a month since he first heard about it three years ago – in 2019. Doing this for five years would have meant that Joe invested a total of $9,000 which would now be worth $25,593- a 184.38% ROI.
But if he had started doing so five years ago, he would have invested $15,000, which would currently be worth about $77,000 – a return of more than 400%.
Both results demonstrate a considerable return, despite the fact that Bitcoin’s price crashed by more than 50% from its all-time high in November 2021.
Of course, it’s also possible for your investment to be underwater (losing) at certain periods of time. But the DCA strategy is beneficial in such events as well because you will have a close average to the current price. This, naturally, doesn’t account for black swan events where the price of an asset crashes by (for example) 50% in a day – nobody can be consistently prepared for this. But even if it happens, if you keep buying under the DCA strategy, your average entry will reduce as well, putting your buying price closer to the current price.
The moral of this story is that the earlier you adopt a DCA strategy, the higher your ROI, as the risk of buying at a relatively high price (like in April or November 2021) is minimized over time. DCA allows one to average down their purchase price.
Now DCAing is not limited to Bitcoin. You can apply this strategy to every investment, keeping in mind that it is best suited for investors who are looking to make long-term plays over several years.
At CryptoPotato, we were the first to build a prototype DCA calculator for Bitcoin investors in 2016. Nowadays, others have jumped on board with tools such as dcabtc.com.
Analysis of historical Bitcoin price data carried out in partnership with Bitrated Founder Nadav Ivgi produced some interesting conclusions. The analysis utilized exchange data from 2010, when Bitcoin was worth less than a dollar, through the end of 2016 (when the price was down more than 70% from the 2013 high of around $1,180). We intentionally ignored data from 2009 when Bitcoin was worth a few cents.
Interestingly, the analysis found that a dollar cost averaging investment approach produced a positive ROI over most time periods. In fact, DCAing for at least 2.5 years ensured a positive ROI 100% of the time – even for those who bought Bitcoin in late 2013, near its high of $1,180.
The bottom line: Dollar cost averaging into Bitcoin between August 2010 and December 2016 achieved an incredible 58,685% return on investment (ROI).
Each square in the chart represents an investment period between August 2010 to December 2016, where the minimum period is six months. The color of each square represents the ROI: green means a positive return; red represents a negative return. The leftmost square on the top line represents the first measured period (August 2010 to February 2011, of fixed daily investments.
Each line begins in a new month, and each square represents another month. For example, the second square in the top row represents the return on investment between August 2010 and March 2011. The first square in the second row represents the return between September 2010 and March 2011.
The highest concentration of red squares represents late 2013 and early 2014 when Bitcoin’s price reached an all-time high that was not revisited until the beginning of 2017.
Click here for the full graph – including investment periods and ROI when hovering any square.
In summary, the DCA investing method is perfectly suited to a long-term Bitcoin investment. Many believe that Bitcoin will continue to rise over time since its supply is limited. However, nobody can tell for sure if now is a good time to buy or if the price is too high. That is why dollar cost averaging is so effective.
