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Beginner’s Guide to Investing in Cryptocurrencies using Dollar Cost Averaging (DCA)

16 September 2020 | ZebPay Trade-Desk

Dollar Cost Averaging (DCA) is an investment strategy in which an investor divides a certain amount of money to be invested over a period of time. This helps to reduce the impact of volatility on the overall purchase, but also helps protect liquidity for the investor. The purchases occur irrespective of the underlying asset’s price, and at regular intervals.

The dollar cost averaging method assumes that the price of an attractive asset will continue to rise, hence postulating that to benefit from significant ROI appreciation, one must invest in a timely manner over extended periods of time. 

The two most popular assets today are Bitcoin and Ethereum. Let’s first understand what each of these are, and then use some examples to understand how the dollar cost averaging investment strategy could help an investor build wealth, assuming they were to use it to invest in these two assets.

Bitcoin (BTC)

The Bitcoin Network is the first successful implementation of blockchain technology. The blockchain network is not centrally controlled by a bank, corporation, or government, which means that the blockchain technology on which Bitcoin operates has several advantages. More user autonomy, better accessibility, elimination of banking fees, peer to peer focus, very low transaction fees, low cost of trading, low deposit amounts, no global boundaries, and an exceptionally secure environment to transact are a few of the unique advantages.

Bitcoins are limited in supply, which makes them scarce and valuable. Only 21 million coins will be issued. At 191.80 billion U.S. dollars, Bitcoin has the largest market capitalization.

Bitcoin Summary (at the time of writing):

Market Capitalization  $191,803,922,861 
Current Price $10,374.22
Avg. Daily Volumes $75,969,773,593
ROI (frm ICO Price) 7,567.57%
7 Day High/Low $12,067.08 / $11,185.94
Scripts is Circulation  18,488,518 BTC

Using Bitcoin Dollar Cost Averaging to Invest in Bitcoin: If implemented correctly, the dollar cost averaging method of investing in an asset can result in significant gains for an investor. Below is an example of how an investor could benefit from deploying Bitcoin dollar cost averaging as an  investment strategy.

  2020Y (CY) 2019-20Y (2Yrs) 2018-20Y (3 Yrs) 2015-20Y (5 Yrs)
Total Amount Invested (USD) $9,00.00 $2,100.00 $3,200.00 $6,800.00
No. of Bitcoins 0.100541 0.289775 0.462906 7.84386
NPV (USD) $1,048.24 $3,021.20 $4,826.26 $8,1780.12
ROI 16.47% 43.87% 50.82% 1102.65%

Investment VS NPV
Investment VS NPV

As seen in the table above, an early adopter of the Bitcoin token, on a dollar-cost averaging would have made a return of ~1100%, by investing just $100 each month for the last 5 years. Similarly, someone who started investing 2 years back, would have made a ROI of ~44%, using the same exact principal. Investors who use a dollar-cost averaging strategy will generally lower their cost basis in an investment over time. 

The graph to the left reflects the NPV of this investment, by investing $100/month ($1200/yr) for a period of 5 years. Investors who used the Bitcoin-dollar cost averaging method when Bitcoin price was at ~$300 levels in 2015, can witness returns in excess of 1000%, and very high NPVs as well. The NPV reduces for later entrants, as the underlying asset has appreciated significantly, driving prices up and that trend can be seen in the table and chart. 

Ethereum (ETH)

Like Bitcoin, Ethereum too is a distributed public blockchain network. While there are significant technical differences between the two, it is important to note that they both have a very different purpose and capability. Ethereum focuses on being able to successfully implement programming codes on any decentralized applications, using smart contract platforms. The Ethereum network went live on the 30 July 2015, with 73 million Ether pre-mined. Today it is the 2nd largest token by market capitalization.

Ether is the native currency of the Ethereum network. The digital money can be sent anywhere instantly, as a form of payment or store of value. Anyone in the world can freely connect to the Ethereum network. Blockchain allows smart contracts’ code to be run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.

Ethereum Summary (at the time of writing):

Market Capitalization  $42,402,501,584
Current Price $376.56
Avg. Daily Volumes $19,413,830,960
ROI (frm ICO Price) > 9000%
7 Day High/Low $487.21/ $ 374.87
Scripts is Circulation  112,604,996 ETH

Using Dollar Cost Averaging to Invest in Ethereum: Below is an example of how an investor could benefit from deploying this investment strategy in case of Ethereum.

  2020Y (CY) 2019-20Y (2Yrs) 2018-20Y (3 Yrs) 2015-20Y (5 Yrs)
Total Amount Invested (USD) $900.00 $2,100.00 $3,200.00 $6,100.00
No. of Ether 4.063538 11.078940 14.926450 770.26161
NPV (USD) $1,527.89 $4,165.68 $5,612.35 $289,618.37
ROI 69.77% 98.37% 75.39% 4647.84%

As seen in the table above, an early adopter of the Ether token, on a dollar cost averaging would have made a return of ~4600%, by investing just $100 each month for the last 5 years. Similarly, someone who started investing 2 years back, would have made a ROI of ~98%, using the same exact principal. 
NPV VS Investment

The graph to the left reflects the NPV of this investment, by investing $100/month ($1200/yr) for a period of 5 years. Investors who used the Bitcoin-dollar cost averaging method when BTC was at ~$0.97 levels in 2015, can witness returns in excess of 4000%, and very high NPVs as well. The NPV reduces for later entrants, as the underlying asset has appreciated significantly, driving prices up and that trend can be seen in the table and chart. 

Conclusion

The crypto universe is vast, with many assets to trade and invest in, and here we have presented an investment strategy that can be deployed to benefit over longer periods of time as assets like these gain more traction, and become more attractive. Investing using the dollar cost averaging strategy, provides a great avenue towards building wealth over a period of time. It helps to mitigate risk, reduce volatility and most importantly preserve liquidity in the hands of investors. Over time, wealth accumulates, and ROI’s see significant improvements, as we have seen in the case of Bitcoin and Ethereum above. Returns are significant, despite smaller sums of money being invested on a monthly basis.

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References:

Disclaimer: This report is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. The Company has prepared this report based on information available to it, including information derived from public sources that have not been independently verified. No representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein. This report is preliminary and subject to change; the Company undertakes no obligation to update or revise the reports to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. Trading & Investments in cryptocurrencies viz. Bitcoin, Bitcoin Cash, Ethereum etc.are very speculative and are subject to market risks. The analysis by Author is for informational purposes only and should not be treated as investment advice.

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