So, you have some money and finally decided to buy some bitcoin. Great! But is there a strategy to buy bitcoin so that you get the maximum gains from your purchase? If you listen to Bitcoin podcasts or follow Bitcoin Twitter, the standard advice is to get yourself into a habit of “dollar cost averaging” into bitcoin. There are some definite advantages to this, and I'll get into them below, but dollar cost averaging (DCA) isn't the only way to buy bitcoin, and to be honest, it might not even be the best!
There are pros and cons to every strategy, and I have my own strategy for buying, which I'll share in this post below.
Whatever strategy you choose, there are just a couple of main things to keep in mind to be successful.
Don't trade. Nobody can guess which way the market is going, even the chartbois. Even if you “have a feeling” bitcoin is going to go one way or another, you'll be wrong as many times as you are right. The important thing is to stack sats. Sometimes you stack more, sometimes less.
Don't use leverage. Using leverage is a great way to lose bitcoin. When bitcoin goes down violently, it's usually due to leveraged traders getting liquidated. As an average retail investor, that could easily be you.
Don't overextend yourself. You never know what life is going to throw at you. Buy bitcoin using money you won't need for another 10 years. I just had to unexpectedly replace a water heater for $1,500 last month. If I was truly “all in” bitcoin, I would have had to sell some, otherwise my infant would be taking cold baths for all of October.
There are lots of memes about selling your chairs or getting a second mortgage on your house to buy bitcoin, but they are either jokes or for people in circumstances where they feel comfortable with high risk activities. Bitcoin's price can go up and down based on rumors or unexpected geopolitical events. Buying bitcoin in a way that you are not overextended is a very effective way of protecting your stack, so you never have to sell.
Don't compare yourself to others. It's easy to get caught up worrying that you didn't buy early enough, and that you'll never own a whole bitcoin. Buying bitcoin isn't about having more money than everyone else. It's about protecting your own wealth. There's always going to be someone with more bitcoin than you, and you just have to let it go.
If you want more money and a healthier lifestyle, better put yourself first. Study more. Get a better job. Cut unnecessary costs. Set goals and make good habits so you can reach them. That's how you improve your lifestyle – not by YOLOing into a bitcoin position and hoping for the best.
It doesn't matter how much bitcoin you have. The point is that you have some.
Denominate your gains in Bitcoin. Stacking bitcoin is about getting more bitcoin than you had before. Your fiat gains will go up and down, sometimes by A LOT, and in a short period of time. It'll drive you crazy to sit there and watch your net worth increase or decrease by 50% over a year. If you just focus on how much bitcoin you have, then you'll always be successful. Even just stacking 100,000 sats in a month counts as a win!
Buy according to your comfort level. One of the key ways to make sure you end up with more bitcoin at the end of every month is to never sell. If you are losing sleep at night or watching the charts every couple of minutes, then you may have too much bitcoin in relation to your risk tolerance. With big price movements up or down, you may become emotional and sell, then regret it later.
In general, it's smart to only buy bitcoin with money you don't immediately need. Keep your time preference low. It's OK if you don't stack as hard this month as you did last month. Live your life and stack. Not one or the other.
Control your own keys (cold storage). Buying and owning bitcoin means that you actually take ownership of the bitcoin. If your bitcoin lives on an exchange, then it's not your bitcoin. It's a bitcoin credit. There are many risks to having your bitcoin on an exchange, including exchange hacks, withdrawal limits, spending restrictions, and state confiscation.
Not your keys, not your coinsBitcoin Proverb
There are many compromises you may make as a new bitcoiner, but key ownership should not be one of them. Buy a hardware wallet. Secure your keys. Practice using your wallet so you get comfortable, then transfer your bitcoin to cold storage.
Learn how to use bitcoin properly. Contrary to popular advice, I don't recommend the “buy and forget” strategy. It's important to know how to use bitcoin tools, including securing your bitcoin confidently. I realized this was important when I bought and forgot about my bitcoin, but then started to forget basic information like the password to my wallet, or where the key was stored. Then, I extrapolated that out 20 years, and realized, what if bitcoin really does hit 1 million dollars per bitcoin? Will I actually know how to use it?
Then, as I went down the rabbit hole and learned more about why bitcoin is important, I became even more confident that buying bitcoin was the right choice.
Bitcoin With Dollar Cost Averaging VS Lump Sum Investing
That was a pretty long introduction to get to the heart of what we're talking about in this article, but I really wanted to set you up with the idea that aside from a few basic rules, there's no wrong way to buy bitcoin. Distilled into a single sentence, don't buy more than you can afford, and secure your bitcoin properly. Beyond that, figure out what works for you, and go nuts.
Here are my thoughts on dollar cost averaging vs lump sum buying bitcoin.
Pros To Dollar Cost Averaging
Most bitcoiners will tell you that DCA is the way. Dollar cost averaging means that you set a flat, recurring buy for a set time period. For example, you could buy $1,000 worth of bitcoin every month on the first day of the month, or $100 every week on Sunday. This means you buy bitcoin no matter the price movements.
This is a great way to “life hack” your way to more bitcoin. You just set a certain amount you want to buy, and your fiat lifestyle adjusts. You learn to live within your means, and you don't miss that money. Instead of manually separating yourself from that money each week or month, it just auto-converts to bitcoin, and you don't even think about it. You stack more bitcoin, and you move on. There's no headache or hesitation.
Long term, it doesn't matter if you buy at $100 vs $500 or $10,000 vs $50,000. Once you “get bitcoin”, you'll want to get more bitcoin. You'll be buying bitcoin for your entire life. You'll buy some this year, and next year, and in 30 years.
It's going up forever, Laura.Michael Saylor
In a bear market, dollar cost averaging into a bitcoin position usually outperforms lump sum buying. You make your recurring buy no matter the price, and you can catch the dip, no matter how deep the dip goes.
Cons To Dollar Cost Averaging
One potential downside to the DCA strategy which is specific to bitcoin is that you may have UTXOs to manage. This will depend on how you're actually buying the bitcoin, but it does have the potential to make your future bitcoin spending more complex, and more expensive.
What's a UTXO?
Basically, UXTOs are like pieces of a bitcoin. If you do five separate bitcoin buys of 0.001 bitcoin and send them directly into your cold storage wallet, you don't have a single chunk of 0.005 bitcoin. You have five separate pieces of 0.001 bitcoin. If you then go to spend 0.003 bitcoin in the future, you have to combine four of those pieces (three pieces plus another to pay for fees). Combing those pieces takes up more data than if it was just a single piece, so it costs more money to send a transaction.
This happens automatically, so that's not the complexity issue, but if you want to save yourself on fees, UTXO management could add some complexity.
In a low fee environment, where not a lot of people are sending bitcoin, it's not a big deal. You may pay 600 sats instead of 300 sats to send a transaction. It's like the difference between $1.60 and $1.80. It doesn't matter. In a high fee environment, that difference may add up to significant fees, meaning you pay $50-$100 or more, depending on the value of bitcoin in USD at the time.
One way to prevent having tons of small UTXOs is to combine them. This is done by occasionally sending bitcoin to yourself during a period where it's cheap to send bitcoin. For example, I could pay 1-2 sats per vByte to send a transaction to myself on a Sunday evening and have it confirm within an hour. Then, all my small UTXOs would now be a single big UTXO in the same wallet.
There are some privacy concerns with doing this though, since this can connect large amounts of bitcoin to a wallet, a name, or even an IP address and physical location. Combining UTXOs is not always ideal.
This will also depend on your actual withdrawal strategy. You may be DCAing weekly on an exchange, then withdrawing once a month, in which case you don't have the small UTXO problem.
Another potential issue with DCA is that you need to track your own transaction record in detail for proper tax payments in the future. Four transactions per month times ten years is a lot of different buy prices. When you sell your bitcoin, you'll need to know which transaction you used, as well as the date and the buy price. Some exchanges track this information for you, and there are 3rd party services that do this too, but this exposes your private information to corporations and assumes that you use just one exchange for the next decade.
So, in terms of spending bitcoin in the future and tracking buy prices for tax purposes, it's easier to have just a few big buys rather than a lot of small buys.
Pros To Lump Sum Investing
The best reason to buy as much bitcoin as you can right now, in one go, is that historically, you're likely to get better returns. Though it refers to stocks, not bitcoin, Vanguard did a study that back-tested the two methods of DCA and LSI, and found that 66% of the time, LSI outperformed.
More recently, someone on Twitter ran the analysis for bitcoin specifically, and came out with some interesting numbers. Lump sum investing outperformed consistently across 1, 2, 3, and 4 year time periods.
Of course, there are some caveats.
First, you have to realize that some of the time lump sum investing underperformed. Doing the LSI method does not guarantee better results. Nobody can predict what the market will do. That being said, you have a better chance of outperforming with LSI because you get immediate market exposure.
Second, of course, the study was done with equities, not bitcoin. Bitcoin is its own beast. I haven't done the math, so can't say that it works out to be the same. Since most people become interested in bitcoin during bull markets, your chance of buying a top is greater in bitcoin may be greater than in stocks.
That being said, the logic remains the same. When you dollar cost average, you are essentially trying to time the market. You are so desperate to not buy a top, that you spread out your buys consistently over a period of time. With dollar cost averaging, although you have a greater chance of getting that good feeling of buying the “buying the bottom”, you also lose the opportunity to be “all in” if the market takes off.
With bitcoin, when the bull market runs, it goes up fast and hard. If you are doing weekly monthly, you could miss out on a 50%-100% run during that time period.
Which scenario would you rather be in?
Scenario 1: Dollar cost averaging, you buy $10 worth of bitcoin at $100, $80, $70, $120, $150, $200 (total $60)
Scenario 2: You buy a lump sum at $100 and watch it go to $200 (total $60).
In the first scenario, you end up with $113.5 ($20 + $25 + $28.5 + $16.6 + $13.3 + $10).
In the second scenario, you end up with $120.
In the first scenario, you bought the dip. In fact, you bought the bottom! Some of your money almost triples in value, but some of it only doubles, and some of it only goes up 50%. Some of it buys the local top, and may lose some value in the coming weeks. In the second scenario, all of your money doubles. So although you have a good feeling of being smart in Scenario 1, you actually make less money.
I also want to mention that I do not look at lump sum buying as a one-time event. I'm not suggesting market timing, or saving your money for some future date to buy based on some kind of criteria. Since I think bitcoin is savings technology, and my goal is to never spend more than I earn, I will have many opportunities to add to my savings over my lifetime.
To me, lump sum buying means that if you have $10k to invest in bitcoin, you market-buy $10k. You don't set up 10 buys over the next 10 weeks.
Cons To Lump Sum Investing
One of the issues with lump sum investing is that it requires high conviction to buy at any price, and “diamond hands”, so you don't panic sell the dips. It's happened many times over my years of buying bitcoin where I buy a big chunk, and the market dips 15% the next day. Sometimes it feels like I personally move the market!
If you do have cash sitting on the sidelines and are considering buying a chunk of bitcoin all at once, the first thing you're probably going to ask is, “Is right now a good time to buy?” Most people will have a strong desire to wait for a pullback, no matter the price, so they feel like they are getting a discount. If bitcoin is sitting at $20k, they want to wait for $15k. If it's sitting at $50k, they want to wait for $30k.
Hesitation to buy and fear of an immediate dip afterward could cause you to wait…and wait….and wait…until it's too late. If you are especially risk-averse, then DCA might be a better strategy for you.
The truth is, however, if you've done your homework, then you understand that it's likely going way higher in purchasing power, so it doesn't really matter what price you buy at now. If you bought bitcoin 10 years ago, would you care if your entry price was $2 or $5? No! If the price of bitcoin is $1 million, would you care if you aped into bitcoin at $60k, then it dumped to $30k? Also no. 10 years into the future, you won't know the difference.
That is the logical way to think about it, but humans are illogical, and we hate losing more than we love winning (negativity bias).
What's very possible is that you'll wait for the market to dump, but it'll go up multiple weeks in a row. Then you'll finally take action when you just can't stand missing out. Then the market will pull back. Happens all the time. The feeling has become meme in the bitcoin community, as shown in the video below.
It really sucks to buy the top of a bull market as a new market participant. You'll feel dumb and disillusioned. You'll experience regret. Those feelings may take over, force you to sell at a lower price than you bought, and you may have negative feelings about ever returning to the market. I have experienced this myself. I YOLO'd into a bitcoin position in December 2017 when the price was $18,000+ for more than I should have, then the market dumped a few months later to below $10,000. I had to sit on those negative feelings for 3 years during a bear market!
In this particular situation, buying the 2017 top wasn't a good move. It would have been better to DCA. I would have bought all the way down the ladder as bitcoin retraced from $20k down to $3k over the next year. Who could have guessed that though?
The good news is that I didn't use leverage and I didn't bet my rent money. I ended up buying more bitcoin regardless, and looking back, stacking at $20k wasn't a big deal. Now we're sitting at
$51k $54k $55k $47k!
My Strategy For Buying Bitcoin
The comparison above between dollar cost averaging vs lump sum buying of bitcoin is meant to be an objective look at what's going to be a better strategy, in which situations. For me personally, I don't follow either strategy religiously. I've been buying bitcoin for some years now, and do things in my own unique way.
First, some mistakes I learned along the way:
I used to get caught up in “buying the dip”, but then I realized that sometimes the dip wasn't the real dip. Bitcoin could go down 5%, then another 10%, and so on. There was always going to be another dip to buy. A dip of 5% could be followed by a rally of 15%. I could never predict what was a low and what was a high.
Another stupid move I would do is to try to wait out price action until the market corrected. The price of bitcoin would shoot up 10%, and I'd think the rally was unsustainable. I'd think to myself, “I'll sit this one out and wait for it to go back down”. There were many times when it didn't go back down, so my entry price just ended up being way higher than expected.
I like the idea of DCA, but my money habits are just not consistent enough to stick to it. I have a lot of home projects I do, so one month I may have a chunk of money I can use to add to my bitcoin stack, other months I have big expenses. For example, this month I dropped $800 on a plate compactor and $300 to replace my 18v electric drill with a 20v version. DCA with fixed amounts just doesn't work for me.
So, here's how I buy bitcoin: When I have a chunk of money I want to allocate to bitcoin, I just buy it as whatever the price, and I do that on a regular basis. I don't wait for dips. I don't auto stack. I just buy bitcoin when I have extra money. Not super complex, right?
I don't try to buy dips anymore because the dip is right now. Buying bitcoin at the price of $31,000 during a bull run is the same effect as buying it at $31,000 during a dip. The dip makes you feel smarter, but the reality is – they are the same.
Next time you hesitate to buy at a “high price”, just think about how you'd feel if it was a dip. Think $60k is too high? What if it was a dip from $100k?
My strategy is a kind of combination of DCA and lump sum. It's DCA in the sense that I do it on a regular basis. It's lump sum though because I don't care about the price or frequency.
To me, buying bitcoin isn't about getting in on some target price and exchanging it for fiat later on. Buying bitcoin is about storing your money in the hardest, most trusted asset to ever exist. As long as I have more bitcoin than the month before, even just a few sats, I'm meeting my financial goals.
Here's a great video with a debate between a bitcoin trader and a bitcoin HODLer. I've started the video at 1:21 to get to the heart of my point, but you can watch the whole 30-minute video for some real insights into why you don't need to be buying and selling this thing. Just buy and hold for the next few decades!
But What About Maximum Gains?
Personally, I think the best strategy for buying bitcoin is to do a single lump sum purchase, then dollar cost average using each month after that. This gets you into a large bitcoin position as early as possible, then allows you to buy consistently over time. You can even now use a company like Strike to get a portion of your paycheck in bitcoin.
Finally, some parting words of advice.
I've given up on the idea of always making the best trade or regretting buying bitcoin at a bad time. To me, buying bitcoin is never a mistake. If I have more bitcoin than the month before, then I'm meeting my goals. There will always be times when I get caught up in FOMO and I should have waited to buy. There will always be times when I should have just gone with my gut and not waited any longer.
In short, today's top will be tomorrow's dip.
I buy bitcoin when I want, and I stack it to cold storage. Buying bitcoin is not a means to be rich and do nothing. For me, bitcoin is a savings technology. It's meant to reduce future uncertainty, as any type of savings is meant to do. I'm saving enough to have optionality and freedom. Don't just buy bitcoin. Work on creating your ideal life and make bitcoin a part of that.
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