Why Dollar-Cost Averaging isn’t an optimal investing strategy for Bitcoin

I have been investing for almost two years, and I often tell people that investing is like art, just as an artist meticulously selects colors and forms to create a masterpiece – an investor carefully chooses assets, diversifies his portfolio, and analyses market fundamentals to achieve financial independence. 

However, if I have to be honest, investing is more reminiscent of martial art, primarily because poor decision-making in both realms often results in frustration and some form of suffering. 

While lying in bed on Friday night, trying to establish a parallel between investing and martial arts, I found myself contemplating whether my recent investment in Bitcoin (BTC) or my upcoming Brazilian jiu-jitsu session would be the cause for my next bout of distress. 

Cryptocurrencies saw huge losses on Thursday, with Bitcoin declining by over 9% on the day, and I made my second investment in BTC for the year. I first invested at the beginning of January and decided to be patient and wait for another price movement before considering any further investments.

My thesis rested on the idea that a surpass of the $30.000 mark would attract a larger influx of investors, which would potentially signal the onset of a bull market, particularly considering the upcoming Bitcoin halving and the market’s fundamental conditions. Conversely, a decrease in the price would only represent the underlying economic conditions worldwide and present a perfect opportunity to accumulate more BTC. 

Any decline in BTC should not be misconstrued as a reflection of the currency’s intrinsic value, since the price fluctuation is distinct from the fundamental value of the technology. Any price movement is primarily relevant in determining whether you should buy or HODL, as it only reflects the demand for the asset at a specific time — an aspect that possesses little significance in the long term. 

Although I still haven’t fully mastered the art of waiting for optimal market conditions, I have almost invested on a couple of occasions this year. I’ve never truly embraced the alternative Dollar-Cost Averaging (DCA) strategy because striving to time the crypto market and capitalizing on price dips always yields more favorable outcomes.

Also, it’s amusing that most eminent hedge fund managers and crypto investors frequently advocate for the DCA approach, yet they often make their own investments when the market is down. This contradiction requires a closer examination of the DCA strategy’s effectiveness and explaining why it’s not the best approach to invest in BTC. 

DCA or not to DCA? Determining an optimal investing strategy for Bitcoin

Bitcoin is the only currency that encompasses all vital properties of hard money: divisibility, durability, recognizability, portability, and scarcity (scalability is up for debate, of course). 

However, its value is essentially established by the collective willingness of individuals to invest in the project. Unlike traditional fiat currencies backed by governments, Bitcoin derives its value from a decentralized consensus among participants in the network. This distinctive valuation mechanism introduces an element of volatility, as investors can occasionally make impulsive decisions, as exemplified by the recent drop in the market.

Bitcoin’s price often undergoes rapid shifts, driven by external factors such as regulatory developments or negative news coverage. Thus, adhering to any DCA approach could potentially cause investors to miss out on opportunities to invest during particularly favorable market conditions.

Bitcoin’s historical behavior includes robust bullish periods followed by phases of corrections. For instance, in 2012, Bitcoin underwent a significant bullish phase. The price experienced a remarkable surge, rising from around $5 at the beginning of the year to approximately $13 by the end of August. This surge was driven by increased media coverage, growing adoption, and heightened interest from investors.

However, after reaching its peak, the price underwent a noticeable correction. Over the next few months, Bitcoin’s price gradually declined, reaching a low of around $2. In 2017, Bitcoin underwent another notable cycle, and we are going through another cycle at the moment. 

Navigating Bitcoin’s unique market dynamics

Savvy investors can recognize and capitalize on these boom and bust markets while they are still present, as the recent corrections haven’t been as prominent, and the percentage fluctuations in the price of Bitcoin have been comparatively less dramatic. For instance, in 2012, we witnessed a substantial decline of approximately 550% in price, and the most recent correction reached around 243% at its lowest point. The continued adoption of Bitcoin is anticipated to play a role in stabilizing the price, leading to a decrease in the frequency of favorable investment opportunities.

The cryptocurrency’s reputation for extreme price volatility is the reason why I’m cautious about employing DCA. Bitcoin’s value can experience substantial fluctuations in short timeframes. While DCA aims to mitigate the impact of such volatility, it might not offer the desired level of protection for highly volatile assets like Bitcoin. This could result in purchasing at both high and low price points, thereby diluting the potential benefits of averaging.

In essence, while DCA has its merits in conventional investment scenarios, it’s impractical for Bitcoin, given its volatile nature. An approach that combines dynamic adaptation to market shifts and informed decision-making might better serve investors seeking to add Bitcoin to their portfolios. 

When to purchase Bitcoin?

Adopting a successful approach to investment in Bitcoin necessitates a thoughtful strategy that takes into account the distinct attributes of the cryptocurrency.

It’s essential for investors to recognize the difference between investing in Bitcoin and participating in the stock market. While a company’s service/product and business strategies could undergo frequent changes, Bitcoin’s core technology remains constant. Therefore, any strategy for investing in the stock market should be guided by the company’s performance and the trajectory of the business. While investing in Bitcoin is primarily rooted in a belief in its potential.

The most challenging aspect of investing in the stock market is to identify a company with a successful business model that has demonstrated consistent performance over time, and then consistently monitor its progress to ensure it remains on a positive trajectory. Conversely, in the case of Bitcoin, the key lies in comprehending the technology and remaining faith during bear markets, while adopting a passive and patient stance during bull markets.

To ensure I follow this model, I prefer to focus on reading books about the potential of blockchain technology and its various applications during bull markets, as I’m not particularly focused on investing. While in a bear market, I closely monitor news and engage with market analyses since it presents some investment opportunities.

It’s imperative to first grasp the underlying technology before even contemplating an investment. In my view, immersing yourself in key readings such as “The Bitcoin Standard,” “21 Lessons: What I’ve Learned from Falling Down the Bitcoin Rabbit Hole” (which is slightly more technical but a worthwhile read), and “Layer Money” can provide essential insights.

I believe everyone should grasp the technology prior to delving into the market. For those unwilling to invest time and effort in comprehending the fundamentals, they might lack the conviction necessary to remain invested in the mark. Justifying your decisions becomes a challenge when you don’t understand the technology from first principles. The effectiveness of my investment strategy hinges on an in-depth understanding of the technology and my strong belief that it will serve as a significant medium of exchange in the future.