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February 16, 2018, 06:28:09 AM |
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Let's say you want to get into Bitcoin. You have dollars (or another currency) and no BTC. You, my smart friend, are well aware that BTC is volatile and so it can be difficult to decide when to "jump in" to Bitcoin. How do you know you're getting a good deal? What if the exchange rate drops? What if it goes up?
Dollar Cost Averaging
Dollar Cost Averaging is an old investment tool to help mitigate the risk of making a stock purchase or sale at the wrong time. Using this technique, you make purchases or sales in fixed amounts over a period of time to overcome the peaks and valleys you see in the day to day volatility. This isn't something I've cooked up, it's how casual investors mitigate risk in the stock market.
Let's say you want to convert $1000 USD to Bitcoin. How do you do it with DCA?
Instead of "timing the market" and trying to buy low (you don't actually have a crystal ball and therefore, despite your gut feeling, don't actually know what "low" means/meant until it BTC already rising again) you buy in fixed amounts at regular intervals over a prescribed period of time. For example, you buy $100 worth of BTC on Monday at noon each week for 10 weeks, regardless of the exchange rate. If BTC is expensive, you effectively buy less of it, preventing you from overbuying while it is expensive. If BTC is cheap, your $100 buys you more, reaping the advantageous exchange rate.
What about if I am dumping BTC for USD?
Not going to HODL? Flip the fixed amount when converting BTC to dollars. Sell, for example, 0.01 BTC at a specific time and day each week until you've sold your desired amount of BTC.
So the other thing to remember about DCA is that it is voodoo magic, but it also isn't. All this strategy does is attempt to use mathematics to avoid major peaks (bad times to buy) or major valleys (bad times to sell). You can still be really unlucky or unsmart. Invest with care.
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