Saving Money is Profitable Again: Dollar-Cost Averaging (DCAing) – PART I: From Fiat to Crypto

Saving is a thing of the past! Our grandparents firmly believed in diligent and loyal saving. But in our 21st century, saving might be considered a bit ridiculous.

Today you may buy a cup of coffee and a delicious cookie with 10 dollars. If you decided to sacrifice enjoying your coffee and the cookie and chose to save those 10 dollars for the future, chances are in about five years you will be able to enjoy only the cookie with that same 10 dollars. You may face a total loss of one cup of coffee. Saving does not seem to make sense in this scenario. Spending the money would actually be wiser.

CRYPTO SAVES MONEY-SAVING

It is logical that saving one’s dollars does not sound like a very smart choice in a world where fiat money loses value every day. However, there is another type of money that, although its value is very volatile, does seem to exhibit probabilities of value-growth in the long term: cryptocurrencies. An exaggerated but actual example is Bitcoin. If you had saved a thousand dollars in Bitcoin 10 years ago, you would be a multimillionaire today.

Naturally, Bitcoin’s case was special and one should not expect to become a billionaire with a cryptocurrency these days! Life is not so easy! However, it is true that every year the use of cryptocurrencies on a global scale increases showing a steady tendency to future mass adoption. It is also true that this growth keeps affecting the price of cryptocurrencies positively, considering the long term.

If the world continues to use decentralized currencies more and more, then this new kind of money will continue to show a direct inverse relation to fiat money that countries issue: market values of cryptocurrencies will continue to increase. Thus, Crypto becomes a sort of attractive vehicle that helps to revive the culture of saving.

WHAT IS DOLLAR-COST AVERAGING (DCAing)

Perhaps the most basic method of saving money is the one our grandparents practiced diligently: put a small percentage of one’s salary in a safe every week or every month. Most of our grandparents didn’t make much money and could only save small amounts. So when they saved, they put away perhaps 5% or 10% of their income, for example.

If you do the same, but you use this percentage to buy a good crypto asset – like Bitcoin or Ethereum -, you will be applying the DCAing technique. To DCA means to invest in an asset by dividing the cost through multiple purchase actions or prices.

If you were to buy a consistent amount of Bitcoin every week for three years, no matter if you start paying $5 per week and in the end you are paying $20, as a total result, the actual price you’ll have paid for each unit of Bitcoin will be the sum of all prices paid during those years (52 x 3 different prices) divided by the number of purchases (52 x 3 purchases).

Your investment per asset – the cost – will be the average of all prices in dollars (if you buy Crypto in dollars; if you buy in Euros, then your scheme would be Euro-Cost Averaging). For most regular workers who depend on a regular salary, DCAing is probably more reasonable and possible than investing big amounts of money in one purchase.

WHAT ARE SOME CLEAR BENEFITS OF DCAing?

The most tangible benefit of the DCAing technique is to save your value in a way that offers you the highest probability of growth. If you save an amount of assets with enough value to buy one coffee and one cookie, and in the future you can use this same capital to buy three coffees and three cookies, your efforts and patience would be well rewarded.

Saving with Crypto offers the possibility of increasing the purchasing power of your assets. Perhaps you’ll think, “Oh, this is the same as saving gold or silver.” It’s true, it is similar. Crypto investors have the belief, however, that in the future Crypto will rise in value much more than precious metals will.

This first benefit is not exclusive to DCAing. It also applies to other types of long-term crypto-saving. One very particular benefit of DCAing is the following: if you buy crypto per week or month, you will have a powerful technique to combat the familiar volatility of the crypto markets. The expense you make on Crypto will be averaged among all your purchases.

It has been statistically proven that, for this reason, DCAing could be the smartest heuristic when investing. You save thousands of hours researching price behavior. Also, you are able to invest a very small amount of money each time you buy. For example, $10 or $20 per month could provide a high return on the investment, if you’re able to maintain a savings plan for a few years.

CAN DCAing BE MIXED WITH ANOTHER TECHNIQUE TO HAVE HIGHER BENEFIT?

If you are a beginner and don’t have much knowledge on Crypto, perhaps the best way to invest is to DCA without mixing strategies. You might want to DCA small amounts of your fiat per week or per month into Crypto and stay quiet for long periods of time.

However, if you have enough knowledge about the crypto-markets and feel confident in your intuitions and abilities to manage more complex investments, then, maybe – and only maybe -, you are ready to mix DCAing with other strategies.

An interesting example – although risky – is to apply the DCAing technique for a period of time, perhaps six or twelve months and sell your cryptocurrrency savings into dollars or other assets. You could do this only if your decisions are based on rigorous analysis of market behavior and if you can sell at a high price during a bull period.

Later, when the market price of that previously sold asset comes back down, one can buy back. If one is able to sell out and buy back skillfully, then it is possible to increase one’s savings substantially. However, these risky trading activities are not recommendable, especially if one is a newbie in Crypto or does not do enough research. Also, one must be aware that they could easily lose all savings, instead of seeing gains.

CAN I DCA ANY CRYPTOCURRENCY?

In theory, yes but it isn’t a very good idea to spend money on a random cryptocurrency without having investigated deeply the nature of the project and what it is all about. Nor does it seem like a good idea to spend a hard-earned salary on a regular basis – weekly or monthly – on a high risk platform. A general, sensible rule is “DCA into a very solid asset with a stable market”.

FINAL ADVICE FOR ANY INVESTOR

Human psychology is complex. When a person acquires the belief that some new type of investment can turn into a magical formula that could lead to huge gains, the mind tends to lose rational control of behavior. Therefore, in the world of Crypto, professional investors always advise like this 1) Never invest more than you can afford to lose, and 2) DYOR (Do Your Own Research!).

This means that you should not invest a large percentage of your money in something. It also means that, if you are going to get on board with a new kind of business or invest in an attractive asset, it is not smart to invest without doing a thorough investigation of the project that you are interested in, including the people who manage it and the underlying technology backing the asset they are offering you.

The only person responsible for your investments and any gains or losses incurred is “you”. Crypto investment should not be seen as a lottery. You’ll need to be careful and not lose control. If you invest a little and win, you will feel huge satisfaction. If you invest a little and lose, you probably won’t feel as much pain and may even feel thankful to have learned something.