Does dollar-cost averaging work with Bitcoin?
- Cash App unveiled several new features during Bitcoin 2022 in Miami.
- Its “Paid in Bitcoin” feature means users can opt to automatically convert a percentage of their income 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 from 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 much 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 U.S. customers can now use Cash App’s “Paid in Bitcoin” feature to automatically convert their salary (or part of it) into Bitcoin.
Clients who’ve connected their Visa debit cards to the service via its Cash Card function can opt 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 roundups. Cash Card users will soon be able to round up purchases to the nearest dollar and automatically invest the difference into 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 sits on top of 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 as well.
Cash App has made some big strides in Bitcoin integration, making it easy for users to use their balance to buy and sell Bitcoin. Unlike other cryptocurrency apps, Cash App only trades Bitcoin.
Is it a good idea to convert part of your salary to Bitcoin?
Here at The Ascent, we are fans of long-term investing — building wealth by buying assets you plan to hold for the coming five to 10 years or more. One popular way to do this is to automatically transfer a percentage of your monthly salary into your investments. Automating your investments can help prioritize them and ensure the more immediate demands on your paycheck don’t push them out of the way.
Regular contributions can also protect against Bitcoin’s volatility and avoid analysis paralysis as 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 dollar-cost averaging — can help even out the price swings without costing you a lot of time.
We analyzed some simplified scenarios to see how dollar-cost averaging compared to lump-sum investing using last year’s Bitcoin prices. Let’s say you had $1,200 to invest in Bitcoin at the start of 2021. If you’d invested it all in Bitcoin, you’d have gotten about 0.038 BTC, which would be worth about $1,650 today. However, if you’d waited and invested that same $1,200 a few months later in April, you’d have gotten 0.021 BTC, which would be worth almost $900 today.
If you’d opted instead for dollar-cost averaging and invested $100 on the fifth of every month, you’d have ended up with 0.027 BTC — worth almost $1,200 in 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 have also done better than lump-sum investors who unintentionally bought at a higher price.
Value of BTC today
Invested $1,200 in January 2021
$1,657 (0.038 BTC)
Invested $1,200 in April 2021
$897 (0.021 BTC)
Invested $100 a month throughout 2021
$1,186 (0.027 BTC)
Data source: CoinGecko and authors calculations
There are a few 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’d invested $100 a month last year, right now your Bitcoin would still be worth less than the cash you put in. But what matters is whether you believe in Bitcoin’s long-term potential. If so, you can wait out these short-term dips and continue to build on your Bitcoin holdings in the hope that today’s Bitcoin will be worth a lot more in 10 years’ time.
Secondly, in many scenarios, dollar-cost averaging wins out over trying to time the market. Sure, if you had bought in January, you’d be in a better position today. However, at a practical level, you might not have had $1,200 to spare last January. For many investors, it’s more realistic to put $100 toward investments each month than spend a lump sum. And in January 2021, nobody knew what the year had in store for us. The price may have fallen. Or you might have waited, got scared of missing out, and bought in March or April — as many investors did.
Automated contributions won’t be right for every investor. And it isn’t a choice between lump sum or dollar-cost averaging — there are other strategies too. For example, some investors choose to “nibble” the dips, buying small amounts every time Bitcoin falls below set levels. It’s good to find investment strategies that suit your habits, knowledge, and financial position.
If you’ve done your research and thought about how the lead cryptocurrency might behave in the long term, putting a small amount of your salary into Bitcoin each month may be right for you. However, it should not come at the cost of other financial goals. If you’re trying to pay down debt or build up 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 bought Bitcoin because they are scared of missing out. Bitcoin may be a good way to build wealth, but it needs to be part of a thought-out investment strategy that includes other assets such as stocks or real estate. It isn’t going to make you into a millionaire overnight, but regular contributions to crypto and stock investments could help you build wealth in the long term.
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