One of the biggest concerns potential cryptocurrency investors face is whether or not investing in them is risky Bitcoin (Crypto: Bitcoin) And other digital currencies. It's a fair question to ask given how volatile Bitcoin has been over the years. While some investors have gotten rich investing in cryptocurrencies, many others have lost a lot.
But instead of making a large, one-time investment in cryptocurrencies, you may want to consider spreading your investment out over time, through a strategy known as dollar-cost averaging. Below, I'll show how investing in Bitcoin would perform if you invested the same amount at the beginning of each month last year, compared to what you would have done if you made just one purchase.
What is your average cost in Bitcoin with your average cost in dollars?
The advantage of making a plan using dollar-cost averaging is that you take out the emotional part of the investment decision-making process. This is the part that can sometimes get you into trouble, through gut feeling or making a rash decision. With dollar-cost averaging, you can only make a plan to buy at the beginning, end, or middle of each month, regardless of the price.
The table below shows you the price of Bitcoin at the end of each day from the first day of the month, and what a $12,000 investment divided into 12 equal investments would have looked like by the end of the year.
|
date |
price |
investment |
Bitcoin |
Cumulative investment |
Cumulative Bitcoin |
Run average |
|
January 1, 2023 |
$16,605.10 |
1000 dollars |
0.06 |
$1,000.00 |
0.06 |
$16,605.10 |
|
February 1, 2023 |
$23,705.10 |
1000 dollars |
0.04 |
$2,000.00 |
0.10 |
$19,529.82 |
|
March 1, 2023 |
$23,631.50 |
1000 dollars |
0.04 |
$3,000.00 |
0.14 |
$20,729.13 |
|
April 1, 2023 |
$28,475.00 |
1000 dollars |
0.04 |
$4,000.00 |
0.18 |
$22,241.70 |
|
May 1, 2023 |
$28,074.50 |
1000 dollars |
0.04 |
$5,000.00 |
0.22 |
$23,205.96 |
|
June 1, 2023 |
$26,814.30 |
1000 dollars |
0.04 |
$6,000.00 |
0.25 |
$23,738.36 |
|
July 1, 2023 |
$30,587.20 |
1000 dollars |
0.03 |
$7,000.00 |
0.29 |
$24,522.78 |
|
August 1, 2023 |
$29,695.90 |
1000 dollars |
0.03 |
$8,000.00 |
0.32 |
$25,068.66 |
|
September 1, 2023 |
$25,811.00 |
1000 dollars |
0.04 |
$9,000.00 |
0.36 |
$25,149.03 |
|
October 1, 2023 |
$27,979.60 |
1000 dollars |
0.04 |
$10,000.00 |
0.39 |
$25,406.05 |
|
November 1, 2023 |
$35,440.10 |
1000 dollars |
0.03 |
$11,000.00 |
0.42 |
$26,077.25 |
|
December 1, 2023 |
$38,703.50 |
1000 dollars |
0.03 |
$12,000.00 |
0.45 |
$26,805.99 |
Prices at the end of the day based on data from Google Finance.
Why investors might have been better off with dollar cost averaging
Today, Bitcoin is trading at around $39,000, and you would get an impressive 45% return based on the average cost of $26,805.99 per Bitcoin, according to the table above. Although you could have gotten a better return if you had bought early in the year with a single lump sum purchase, the average run by the end of the year was lower than what you could have bought Bitcoin for at the beginning of most months.
The benefit of dollar cost averaging is that even though your average may rise in value, this is a good thing, because it means that the price of the asset you are purchasing is also increasing, so your gains are also rising along the way. If the value of the asset declines, you decline on average. As long as you are willing to invest for the long term, this is a strategy that can deliver some strong returns.
Should you use dollar cost averaging to buy Bitcoin and other cryptocurrencies?
If you're looking to invest in Bitcoin or cryptocurrencies in general, dollar cost averaging may be the safest way to slowly learn about them. By not making a purchase for a huge total amount, you don't have to worry about the price at that specific moment in time. If the price goes up, you will profit from it, and if it goes down, the average will go down. But as long as you are confident in cryptocurrencies in the long term, this can be an effective way to spread your risk over a longer period. The key is to know how much you want to invest, and plan your purchases accordingly.
Investing in cryptocurrencies is not suitable for everyone as there is a lot of volatility and high risk. But with dollar-cost averaging, you can minimize this risk by having a plan in place.
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Susan Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Bitcoin. The Motley Fool has a disclosure policy.
Is dollar cost averaging the safest way to invest in cryptocurrencies? Originally published by The Motley Fool
