Does dollar cost averaging work with Bitcoin?
- Cash App unveiled several new features during Bitcoin 2022 in Miami.
- Its “Paid in Bitcoin” feature means that users can choose to automatically convert a percentage of their earnings into Bitcoin.
- Investing a small amount each month can be a good way for long-term investors to buy Bitcoin.
Bitcoin enthusiasts gathered in Miami this week for Bitcoin 2022, its annual conference. Big names in crypto such as Michael Saylor, Cathie Wood, Peter Thiel, and Anthony Pomplaino joined thousands of attendees for four days of talks, discussions, celebrations, NFT art, and more.
Cash App’s new “Paid in Bitcoin” feature
One of Thursday’s most notable announcements came from Jack Dorsey’s, Block (formerly Square). The team announced that US customers can now use Cash App’s “Paid in Bitcoin” feature to automatically convert their salary (or part of it) into Bitcoin.
Customers who have connected their Visa debit cards to the service through its Cash Card feature can choose to automatically convert a percentage of each direct deposit into Bitcoin (BTC). The amount can be adjusted at any time.
Cash App also announced the following new developments:
- Bitcoin rallies. Cash Card users will soon be able to round their purchases to the nearest dollar and automatically invest the difference in Bitcoin. This feature has become popular in other savings and investment apps.
- Improved Lightning Network integration. The Lightning Network is a layer 2 solution that relies on the Bitcoin blockchain to improve its performance. Cash App customers can already send Bitcoin using the Lightning Network, and soon they will be able to receive it too.
Cash App has made great strides in Bitcoin integration, making it easy for users to use their balance to buy and sell Bitcoins. Unlike other cryptocurrency apps, Cash App only trades Bitcoin.
Is it a good idea to convert part of your salary into Bitcoin?
At The Ascent, we are proponents of long-term investing – building wealth by buying assets that you plan to hold for the next five to 10 years or more. A popular way to do this is to automatically transfer a percentage of your monthly salary into your investments. Automating your investments can help you prioritize them and ensure that the most immediate demands on your salary don’t put them off.
Regular contributions can also protect against Bitcoin volatility and prevent analysis paralysis while you wait for the right time to invest. It is extremely difficult to buy the lows and sell the highs, especially if you don’t spend all your time watching crypto prices. But buying a small amount at regular intervals — also known as a buying average — can help smooth out price fluctuations without costing you a lot of time.
We analyzed a few simplified scenarios to see how the dollar cost average versus the lump sum investment using Bitcoin prices from last year. Let’s say you had $1,200 to invest in Bitcoin at the start of 2021. If you had invested everything in Bitcoin, you would have gotten around 0.038 BTC, which would be worth around $1,650 today. However, if you had waited and invested that same $1,200 a few months later in April, you would have gotten 0.021 BTC, which would be worth almost $900 today.
If you had opted for dollar cost averaging instead and invested $100 on the fifth of each month, you would have ended up with 0.027 BTC – worth nearly $1,200 at today’s prices. You wouldn’t have beaten those who managed to invest a lump sum investment at one of Bitcoin’s lows, but you would also have done better than lump sum investors who unwittingly bought at a higher price.
BTC value today
Investment of $1,200 in January 2021
$1,657 (0.038 BTC)
Investment of $1,200 in April 2021
$897 (0.021 BTC)
Investment of $100 per month throughout 2021
$1,186 (0.027 BTC)
Data source: CoinGecko and authors’ calculations
There are some useful conclusions we can draw from these examples. First, Bitcoin is not a get-rich-quick scheme – the price is currently down 35% from its all-time high. If you invested $100 per month last year, your Bitcoin would still be worth less than the money you invested in it. But what matters is whether you believe in the long-term potential of Bitcoin. If so, you can wait for these short-term declines and continue to grow your bitcoin holdings in hopes that today’s bitcoin will be worth much more 10 years from now.
Second, in many scenarios, the average bid trumps trying to time the market. Of course, if you had bought in January, you would be in a better position today. However, on a practical level, you might not have had $1,200 in reserve last January. For many investors, investing $100 each month is more realistic than spending a lump sum. And in January 2021, no one knew what the year had in store for us. The price may have gone down. Or maybe you waited, were afraid to miss out, and bought in March or April, as many investors did.
Automated contributions will not be suitable for all investors. And it’s not a choice between a lump sum or an average purchase price – there are other strategies as well. For example, some investors choose to “nibble” on dips, buying small amounts each time Bitcoin falls below set levels. It’s good to find investment strategies that suit your habits, knowledge and financial situation.
At the end of the line
If you’ve done your research and thought about how the leading cryptocurrency might perform over the long term, investing a small portion of your salary in Bitcoin each month may be right for you. However, this should not come at the expense of other financial goals. If you are trying to pay off debt or build an emergency fund, these should take priority over high-risk investments such as Bitcoin.
Many people have seen the headlines about crypto millionaires or billionaires and have bought Bitcoin because they are afraid of missing out. Bitcoin can be a great way to build wealth, but it needs to be part of a thoughtful investment strategy that includes other assets such as stocks or real estate. It won’t make you a millionaire overnight, but regular contributions to crypto and stock investments could help you build long-term wealth.
Buy and sell cryptos on an exchange selected by experts
There are hundreds of platforms around the world waiting to give you access to thousands of cryptocurrencies. And to find the right one for you, you’ll need to decide which features appeal to you the most.
To help you get started, our independent experts have sifted through the options to bring you some of our best cryptocurrency exchanges for 2022. Check out the list here and start your crypto journey today.