Here’s Why You Must Dollar Cost Average Into Bitcoin and Ethereum

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Photo by Art Rachen on Unsplash

If anyone tells you they’ve got a “sure thing” to invest your money, run a mile.

There’s no such thing.

You learn this when loved ones unexpectedly die or lose a substantial amount of money, which is far more palatable.

Bitcoin and Ethereum maximalists will have you believe that their Blockchain is the one worth investing in.

It’s tribalism 101.

Social networks are so hard to dethrone for this very reason.

Google attempted to create a competitor social media site to Facebook, and Twitter called Google Buzz; it turned out to be anything but a Buzz.

It fell flat on its face because analysts realised users didn’t have the mental arithmetic to download another social media app similar to its competitor's.

We’re talking about Google here — a company with a $1.7 Trillion market cap.

Facebook and Twitter users protected their chosen social media app with the type of tribalism you’d expect from a contact sport.

Buzz launched in February 2010 and was caput by October 2011.

I use Social Media as an example because we see the same tribalism In cryptocurrency communities.

There’s this; “it’s them or us” mentality.

Why can’t it be both?

Modern financial advisors will usually say to diversify your risk over multiple assets.

I’m not a financial advisor, and I’m also yet to meet one that’s ever recommended Crypto as an investment. Maybe at some point, they will.

In an already risky market, you have to mitigate risk as much as possible; in the following few paragraphs, I’ll show you how.

What is Dollar Cost Averaging?

This strategy supports your efforts to invest the same amount of money regularly over a certain period, regardless of price.

It can make it easier for you to deal with uncertain markets by making automatic purchases at regular intervals.

Using this strategy in a ‘down market’ may lower your average cost price and reduce the impact of volatility on your portfolio.

Finally, it removes the emotion from the whole experience by eliminating the pitfalls of trying to time the market.

To be clear, when you look at the maths, dollar cost averaging (DCA) doesn’t make you more money than a one-time, lump-sum investment.

DCA is a preventative measure against you and your emotions, shielding you from market volatility, avoiding the nuke button and completely self-destructing.

Research from CNBC looked at rolling 10-year returns on the stock market on $1 million starting in 1950 and compared results between an immediate lump-sum investment and dollar-cost averaging.

Investments in stock portfolios with a lump sum invested outperformed dollar-cost-averaging 75% of the time.

Investments in the Bond portfolio outperformed dollar-cost-averaging 90% of the time.

You’re probably thinking, why the hell would I DCA then?

This isn’t a math problem you’re trying to solve

It’s this;

  1. You’re removing emotion from the most volatile asset in human history; Mathematically, you may not get the best upside, but what it gives you is staying power and time in the market.
  2. Mistimed lump sum payments can often put you in a position of being overleveraged, resulting in selling during a down market; These lessons are best learnt from others.

Here’s what not having a plan and selling at the bottom of the 2018 ICO crash looks like.

Yep, that’s me;

Credit — My Coinbase Account

How to choose your Crypto

All you want to do here is search for and amplify your winners.

Putting money into something consistently is easier if it’s already shown a track record of winning.

It would help if you viewed Cryptocurrency the way you view business start-ups. They have to be passed the proof of concept phase.

I know thousands of coins out there could go to the moon, but you don’t want to be in a position where you’re guessing, wishing and hoping for an Elon Musk Tweet to pump your bags.

It’s my personal opinion that there are only two Blue Chip cryptocurrencies.

  • Bitcoin — Which is digital Gold
  • Ethereum — Smart Contract and Internet money

The most notable crypto-savvy investor and most followed Crypto thought leader, who goes by the pseudo-anonymous name @Punk6529 in a mega thread, has this advice;

Source — Punk6529 Twitter

How to think and how to structure your portfolio

You must be playing with money you are happy with going to zero.

I never want any of my money to go to zero, but knowing that it’s money I don’t need for bread and milk allows me to sleep at night.

If you’re overleveraged with too much skin in the game, it’s impossible to hold onto everything without stressing you out or having to sell everything when the market is down.

According to Punk6529, the beginner’s portfolio would be to;

  • Invest 50% into Ethereum
  • Invest 50% into Bitcoin

With an even split across the two.

Once you feel good about your knowledge in the space, take a smaller percentage of around 10% to 20 % for some higher-risk cryptocurrencies.

Source — Punk6529 Twitter

How big is the opportunity for your Crypto investment?

Nobody knows.

So far, nobody who has ever invested in Bitcoin and Ethereum over five years has lost money.

Despite volatility, the adoption curve for both digital assets continues to increase.

The most insightful logic I’ve read around this was from Punk6529, and I’ve inserted the lengthy extract.

It’s worth your time to understand this.

“Today, about 0.5% of global asset value is represented by decentralised digital crypto assets. We have about $360T in global assets.

The actual total is comfortably above $400T. Crypto market cap is about $2T.”

The details of the market cap calculations do not matter so much.

I think of it as $2T/$400T

For me, the macro question is:

“In 2030, will the % of global asset value represented by decentralised digital assets be more or less than 0.5%?”

For me, the answer is: “probably yes from a technology perspective, but maybe not because of regulation / the centralised system.”

My first form of analysis is an “expected value” analysis.

e.g. Say there is a 50% chance that crypto % of total assets goes to 1% and a 50% chance that crypto ends and goes to 0%.

In this case, we should be neutral. 50% x 1% + 50% x 0% = 0.5% = where we are today.

My view is that the chances that crypto doubles are significantly higher than it goes to zero, which means the expected value is positive.

Therefore I would like to have a crypto investment, even today. [I first did this analysis when crypto was 0.005% of the global market cap]

The entire thread is here.

Have a five-year time horizon; staying power is more critical than timing the market perfectly.

You can easily set up recurring payments straight from a Coinbase Account, so what’s stopping you?

If you’ve come this far, I appreciate you and hope this helps.

Be patient and enjoy the journey.

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This article is for informational purposes only; it should not be considered financial, tax or legal advice. Consult a financial professional before making any significant financial decisions.