2 of the biggest crypto investors in the world average the dollar cost of Bitcoin. Should you? | The Motley Fool

Despite the epic crypto market crash, two of the biggest crypto investors in the world are doubling down on their crypto bets. On November 16, the President of El Salvador, Nayib Bukele, announced that his country would buy one Bitcoin (BTC -0.62%) per day, every day, starting November 17. Almost immediately after, crypto entrepreneur Justin Sun announced that he would adopt the same Bitcoin strategy.

This Bitcoin The strategy is, quite frankly, the ultimate way to average dollar cost in crypto. Both investors have committed to buying Bitcoin every day, at roughly the same dollar amount, regardless of market conditions. And both add to already massive Bitcoin positions. El Salvador, for example, has already invested over $100 million in Bitcoin. So is a similar type of strategy suitable for the average investor?

Benefits of cost averaging

Recurring purchases by fixed sums has already proven to be a successful strategy with equity investors, and mounting evidence suggests a dollar cost averaging strategy could be successful for bitcoin investors. In a standard dollar-cost averaging strategy, you invest the same predefined amount on a regular basis (eg, weekly or monthly), regardless of market conditions. This takes the emotion out of investing and eliminates the dangers of trying to time the market. Instead of worrying about daily ups and downs, investors continue to buy on a regular schedule.

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Another advantage of cost averaging is that you end up paying less for a long-term (dollar) investment because you buy when prices rise and fall. You can see this immediately with El Salvador and its Bitcoin strategy. Moving towards its new dollar cost averaging strategy, for example, El Salvador had purchased a total of 2,381 Bitcoins at an average price of $43,357.

The average price is so high because El Salvador started buying Bitcoin in September 2021, around the time Bitcoin was hitting all-time highs. Now that El Salvador is buying Bitcoin at a price below $20,000, this average cost will continue to drop over time until Bitcoin returns to all-time highs.

How to Convert Average Cost to Bitcoin

While most retail investors can’t buy $20,000 worth of Bitcoin every day, they can certainly adopt a modified strategy, like $50 a week or $200 a month. With the purchase average, there are many ways to adjust the parameters. For example, it could be argued that Bukele and Sun are adopting a “modified” dollar cost averaging strategy. Instead of committing to a fixed daily amount, they commit to an amount that will allow them to buy a full bitcoin. Since Bitcoin is currently trading around $16,500, some days they might invest $16,000 and other days they might invest $17,000.

Obviously, you will need to tailor your strategy to your specific investment and financial goals. Typically, the most popular dollar cost averaging strategies are monthly rather than weekly or daily. This helps reduce trading costs and also eliminates any temptation to time the market. Cost averaging can very quickly become a “set it and forget” strategy, especially if you automate the monthly allocation of investments.

The cost average in action

Using widely available websites, you can see how any dollar cost averaging strategy for Bitcoin would have performed over a specific time frame. On many sites, you can adjust parameters such as the amount you invest, the regularity of your investment and the length of your dollar-cost averaging strategy.

For the sake of discussion, let’s say you started investing $100 per month in bitcoin a year ago, around the same time that El Salvador started buying bitcoin on the market. Your $1,200 investment would now be worth $1,150, a 4.17% drop in market value. This may be depressing to some, but it’s certainly better than the 62% drop El Salvador reported on its Bitcoin position. The cost average does not guarantee that you will make money on your investment, only that the pain will be much less palpable if the market craters.

Do I have to pay the cost average in Bitcoin?

Keeping in mind the enormous volatility and risks associated with investing in crypto, a dollar cost averaging strategy can be an effective way to gain exposure to Bitcoin without taking on excessive risk. As seen in the example above, if you averaged the dollar cost of Bitcoin over the past year, you would be essentially the same right now. You wouldn’t panic about the market and you would know that your long-term gains will be very impressive if Bitcoin rallies again. This could explain why two of the biggest crypto investors in the world are now averaging the dollar cost in Bitcoin.

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