Compounding and Saving in Bitcoin: The Power of a Dollar-Cost Averaging Strategy

From Coindesk:

Frequently, I hear other advisors say, “I can’t buy bitcoin for clients; it’s too volatile and adds too much risk.” They’re also worried about purchasing power and inflation with savings rates at 0.50% or less. Bitcoin is an emerging asset class with a market cap of over $1 trillion.

Bitcoin is often called a store of value, and its goal is to be better money. It achieves this by consensus rules and not allowing any single entity or group to change the monetary properties without the majority agree.

Before you question bitcoin’s store of value component, let’s look at the U.S. dollar. Consider that the dollar has lost 91% of its purchasing power since 1950, and the creation of dollars has accelerated dramatically since 2020. Now, let’s look at bitcoin as a savings tool and technology – particularly, through a strategy of dollar-cost averaging, the consistent purchasing of something over an extended period of time. You don’t go “all-in” in this strategy, but instead, look to allocate an amount over a predetermined period of time. This period can have an end date or simply be until you decide to stop.

First, let’s say hypothetically that you had the worst luck with timing ever. You bought the absolute top of the first bitcoin cycle in 2011; if you held for 37 months, you did not lose money. (Rarely would I advocate for a large single lump-sum purchase hoping to find the “right” time to buy bitcoin.) If you understand scarcity and that there will never be more than 21 million bitcoin, when it comes to trying to time the perfect buy, this popular Chinese proverb rings true: “The best time to plant a tree was 20 years ago, and the second-best time is now.”

Bitcoin as a savings tool

You will never be able to time the perfect entry in any initial purchase. The chart below shows the compound annual growth rate (CAGR) of bitcoin over various periods while buying at different intervals. Again, if you had the world’s worst timing and started dollar-cost averaging monthly right into the 2017 price run-up from under $1,000 to a peak of $20,000, you would have still compounded at over 48%.

New York Times best-selling author and decentralized finance specialist with a focus on new and emerging disruptive technology supporting a bankless society.