Despite the epic crypto market meltdown, two of the biggest crypto investors in the world are doubling down on their crypto bets. On Nov. 16, the president of El Salvador, Nayib Bukele, announced his country would be buying one Bitcoin (BTC -0.97%) per day, every day, starting on Nov. 17. Almost immediately afterward, crypto entrepreneur Justin Sun announced he would adopt the same Bitcoin strategy.
This Bitcoin strategy is, quite frankly, the ultimate way to dollar-cost average into crypto. Both investors are committed to buying Bitcoin every day, at approximately the same dollar amount, regardless of market conditions. And both are adding to already massive Bitcoin positions. El Salvador, for example, has already invested more than $100 million into Bitcoin. So is a similar type of strategy right for the average investor?
Benefits of dollar-cost averaging
Dollar-cost averaging has already proven to be a successful strategy with equity investors, and growing evidence suggests a dollar-cost averaging strategy could be successful for Bitcoin investors. In a standard dollar-cost averaging strategy, you invest the same preset amount on a regular basis (such as weekly or monthly), regardless of market conditions. This removes the emotion from investing and eliminates the perils of trying to time the market. Instead of worrying about daily moves upward or downward, investors continue to buy on a regular schedule.
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Another advantage to dollar-cost averaging is that you end up paying less for an investment (in dollar terms) over the long term because you are buying when prices are both rising and falling. You can see this immediately with El Salvador and its Bitcoin strategy. Heading into 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 began buying Bitcoin in September 2021, just about 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 decline over time until Bitcoin regains previous all-time highs.
How to dollar-cost average into Bitcoin
While most retail investors can't buy $20,000 worth of Bitcoin every day, they can certainly adopt a modified strategy, such as $50 per week or $200 per month. With dollar-cost averaging, there are numerous ways to adjust the parameters. For example, one could argue that both Bukele and Sun are adopting a "modified" dollar-cost averaging strategy. Instead of committing to a fixed daily amount, they are committing to an amount that will enable them to buy a full Bitcoin. Given that Bitcoin is currently trading around $16,500, some days they might invest $16,000 and on other days, they might invest $17,000.
Obviously, you will need to tailor your strategy to your specific investment and financial goals. As a general rule of thumb, the most popular dollar-cost averaging strategies are monthly rather than weekly or daily. This helps reduce trading fees and also eliminates any temptation to time the market. Dollar-cost averaging can very quickly become a "set it and forget" strategy, especially if you automate the monthly investment allocation.
Dollar-cost averaging in action
Using widely available websites, you can see how any dollar-cost averaging strategy for Bitcoin would have played out over any specific time interval. On many sites, you can adjust parameters such as how much you are investing, the regularity of your investment, and the time frame of your dollar-cost averaging strategy.
For the sake of argument, let's assume you started investing $100 per month in Bitcoin one year ago, at about the same time that El Salvador started buying Bitcoin in the marketplace. Your $1,200 investment would now be worth $1,150, a 4.17% drop in market value. That might be depressing to some, but it's certainly better than the 62% drop El Salvador has reported on its Bitcoin position. Dollar-cost averaging does not guarantee you will make money on your investment, only that the pain will be much less palpable if the market does crater.
Should I dollar-cost average into Bitcoin?
Keeping in mind the enormous volatility and risk involved in investing in crypto, a dollar-cost averaging strategy can be a successful way to get exposure to Bitcoin without taking on excessive risk. As seen in the example above, if you had dollar-cost averaged into Bitcoin over the past year, you'd basically be even right now. You wouldn't be panicking about the market, and you would know that your long-term gains are going to look very impressive if Bitcoin rallies again. That might explain why two of the biggest crypto investors in the world are now dollar-cost averaging into Bitcoin.
