September 17, 2021
October 14, 2021
As you spend more time riding the Bitcoin rollercoaster, there are many aspects of Bitcoin you grow to love and learn to submit to. You grow to love all of the media and government attacks, and submit to the fact that it takes far more energy to debunk misinformation than it takes to properly inform people. You love to see innovation at breakneck speed, but submit to the rightfully long and painstaking consensus and implementation process that may take years. Most importantly, you submit to the nature of the Bitcoin price. If anyone ever claims that they know the price of Bitcoin tomorrow, you can instantly know that they are frauds. The price of Bitcoin will be whatever it is, with the only thing mattering being how many satoshis you’ve saved. If I have more satoshis today than I did yesterday, it has been a good day. This was called saving in the “old days”.
Bitcoin is not for the weak. The price volatility is nauseating, and whilst the volatility can be dramatically mitigated through regular recurring buys, there is no “optimum buying strategy” for Bitcoin. Buying regularly, also known as Dollar Cost Averaging (DCA), has been shown to dramatically limit losses, but also, dramatically limit gains. For example, in the 8 years since 2014, buying Bitcoin daily only outperformed simply buying Bitcoin in a lump sum on January 1st that year and holding it during 2014, 2015, and 2018.
This can also be seen when we compare the Compound Annual Growth Rate (CAGR) of buying daily, to say, buying once every year, on September 12th (date of this writing). Depending on the day of the year, the 2nd row below table will look extremely different. It looks fairly consistent with DCA whatever day you begin.
So, why is the DCA strategy so widely used and recommended? I always facetiously tell people, “Lump Sum is better than DCA, except for all the times it’s not.” As someone who received their introduction to Bitcoin by buying at the top of one of Bitcoin’s 4 (arguably 5) previous bubbles, I can confidently state that buying a lump sum is vastly inferior to a DCA strategy. The table below tells the story of what happened to top buyers during Bitcoin’s past bubbles, showing how many years it took for top buyers to have a positive CAGR%, as well as what could have been if someone had DCAed during that time.
As you can see, buying in and around a few short periods in Bitcoin’s history could have seen your portfolio in the red for well over 1000 days. Do you think you could have held 1000 days in the red? The first bubble of 2013 is quite interesting, as it didn’t fully resolve until 2015, long after the 2nd bubble of 2013. This is because even though the price would return to above $238 on the run up to over $1000 at the end of 2013, the resulting crash would see price drop below the $238 level. If you were around the ecosystem at the time, the general rule of thumb was “it is impossible for Bitcoin’s price to drop below it’s previous bubble peak”. This proved to be false. In fact, price would go below $238 for a substantial amount of time until we’d never see it again after June 2015.
From this table, we see how a DCA approach, even when started on one of the worst possible days in history, will result in dramatically less pain, for a significantly shorter time. The 2013 double-bubble is again interesting, with those who started their DCA at the top in April 2013 breaking even about 6 months later and enjoying a portfolio in well in profit for over a year, before going negative for another 6 months or so during a horrifying late 2014/ early 2015 period.
So now that you’ve seen the pros and cons, I’ll tell you why I DCA – because Bitcoin is my “religion”. By religion, I mean that it provides me with a framework of beliefs and practices that I strictly adhere to. There are around three core beliefs that all Bitcoiners would agree on. That freedom of expression, including freedom to transact and do business without a 3rd party’s permission is always preferable to censorship; that freedom from inflation and seizure is a human right; and that a peer-to-peer network that timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work is the best way to achieve this, and by extension, fix the root cause of the majority of our social, economic and environmental problems – the proof-of-stake legacy monetary system. In terms of practices, a common one amongst the religious is to keep a copy of their holy text at home. For Bitcoiners, we keep a copy of the blockchain home, and can trust and rely on it to be true. Another practice amongst the religious is tithing or general charity giving – typically 10% of your income – for the sake of God and bettering your fellow man. Many Bitcoiners “tithe” 10% or more of their income into Bitcoin, with the knowledge that should Bitcoin reach its potential as a stable store of value, the root cause of the world’s misery will have been solved. All it takes for Bitcoin to succeed is for people to show faith in it, and the best way to show your faith is by buying regularly. Consider it a charity to both yourself, and the world!
Bitcoin is not for the weak. The price volatility is nauseating, and whilst the volatility can be dramatically mitigated through regular recurring buys, there is no “optimum buying strategy” for Bitcoin. Buying regularly, also known as Dollar Cost Averaging (DCA), has been shown to dramatically limit losses, but also, dramatically limit gains. For example, in the 8 years since 2014, buying Bitcoin daily only outperformed simply buying Bitcoin in a lump sum on January 1st that year and holding it during 2014, 2015, and 2018.
This can also be seen when we compare the Compound Annual Growth Rate (CAGR) of buying daily, to say, buying once every year, on September 12th (date of this writing). Depending on the day of the year, the 2nd row below table will look extremely different. It looks fairly consistent with DCA whatever day you begin.
So, why is the DCA strategy so widely used and recommended? I always facetiously tell people, “Lump Sum is better than DCA, except for all the times it’s not.” As someone who received their introduction to Bitcoin by buying at the top of one of Bitcoin’s 4 (arguably 5) previous bubbles, I can confidently state that buying a lump sum is vastly inferior to a DCA strategy. The table below tells the story of what happened to top buyers during Bitcoin’s past bubbles, showing how many years it took for top buyers to have a positive CAGR%, as well as what could have been if someone had DCAed during that time.
As you can see, buying in and around a few short periods in Bitcoin’s history could have seen your portfolio in the red for well over 1000 days. Do you think you could have held 1000 days in the red? The first bubble of 2013 is quite interesting, as it didn’t fully resolve until 2015, long after the 2nd bubble of 2013. This is because even though the price would return to above $238 on the run up to over $1000 at the end of 2013, the resulting crash would see price drop below the $238 level. If you were around the ecosystem at the time, the general rule of thumb was “it is impossible for Bitcoin’s price to drop below it’s previous bubble peak”. This proved to be false. In fact, price would go below $238 for a substantial amount of time until we’d never see it again after June 2015.
From this table, we see how a DCA approach, even when started on one of the worst possible days in history, will result in dramatically less pain, for a significantly shorter time. The 2013 double-bubble is again interesting, with those who started their DCA at the top in April 2013 breaking even about 6 months later and enjoying a portfolio in well in profit for over a year, before going negative for another 6 months or so during a horrifying late 2014/ early 2015 period.
So now that you’ve seen the pros and cons, I’ll tell you why I DCA – because Bitcoin is my “religion”. By religion, I mean that it provides me with a framework of beliefs and practices that I strictly adhere to. There are around three core beliefs that all Bitcoiners would agree on. That freedom of expression, including freedom to transact and do business without a 3rd party’s permission is always preferable to censorship; that freedom from inflation and seizure is a human right; and that a peer-to-peer network that timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work is the best way to achieve this, and by extension, fix the root cause of the majority of our social, economic and environmental problems – the proof-of-stake legacy monetary system. In terms of practices, a common one amongst the religious is to keep a copy of their holy text at home. For Bitcoiners, we keep a copy of the blockchain home, and can trust and rely on it to be true. Another practice amongst the religious is tithing or general charity giving – typically 10% of your income – for the sake of God and bettering your fellow man. Many Bitcoiners “tithe” 10% or more of their income into Bitcoin, with the knowledge that should Bitcoin reach its potential as a stable store of value, the root cause of the world’s misery will have been solved. All it takes for Bitcoin to succeed is for people to show faith in it, and the best way to show your faith is by buying regularly. Consider it a charity to both yourself, and the world!
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