Frequently asked questions and various info

What is Dollar Cost Averaging (DCA)?

In general, the goal of everyone buying Bitcoin is to get as many BTC at the most affordable price. Because the price always goes up and down, many are trying to buy when it's cheaper. Unfortunately, it's practically impossible to guess when the price reaches its bottom even if you are a professional trader. This is why the Dollar Cost Averaging strategy is popular for long term conservative investing and saving.

DCA is a traditional investing technique meaning always spending the same dollar (or euro) amount, at regular time intervals (eg weekly or monthly), regardless of Bitcoin price at these particular times. By applying this method, you are not suffering from volatility as much, and in the long term you can optimise the average cost of your asset.

Before we move forward, remember that you can buy a fraction of a bitcoin. The smallest denomination of Bitcoin is the "satoshi" (or "sat" for short), it is the equivalent of the cent to the dollar, except there are 100,000,000 satoshis in one bitcoin.

With this in mind, let's find out how DCA actually works. In short, you can buy gif and low, and your average price will be somewhere in the middle.

When you buy low some times and you buy high other times, the average price of your total will be somewhere in the middle, and evens out the extremes. For example, you buy 1 BTC at price € 1, then another BTC at price € 9, your total spending is € 10, which means your BTC average price is € 10 ÷ 2 BTC = € 5 per BTC.

Let's go further and imagine you have € 400 available today and want to buy some Bitcoin. The current exchange rate is 1 BTC = € 4. Without DCA, if you spend all your € 400 now, you will get 100 BTC.

Then, 4 weeks later, if the price of 1 BTC drops to € 1, you will regret your decision and wish you had waited to buy, as you could have gotten 400 BTC instead!

But if you decided to wait until it goes lower, then the price went up to € 20, you would wish you didn't wait, as you can only afford to get 20 BTC now!

Same market, but let's explore the DCA option: what would happen if you spread your buying with DCA over these 4 weeks, buying every week for € 100 worth of BTC?

Scenario 1 - Price goes down:

  • 1st week, you buy € 100 worth of BTC at € 4 each, you get 25 BTC.
  • 2nd week, you buy € 100 worth of BTC at € 2 each, you get 50 BTC.
  • 3th week, you buy € 100 worth of BTC at € 2 each, you get 50 BTC.
  • 4rd week, you buy € 100 worth of BTC at € 1 each, you get 100 BTC.

In total, you got 225 BTC.

You spent € 400 in total, but instead of getting 100 BTC a cost of € 4 per BTC (if you bought all on the first week), now you have 225 BTC with a unit price of € 1.8 per BTC.

Conclusion: You have more BTC, at a lower average cost, by not spending all on the 1st week.

Scenario 2 - Price goes up:

  • 1st week, you buy € 100 worth of BTC at € 4 each, you get 25 BTC.
  • 2nd week, you buy € 100 worth of BTC at € 10 each, you get 10 BTC.
  • 3rd week, you buy € 100 worth of BTC at € 10 each, you get 10 BTC.
  • 4th week, you buy € 100 worth of BTC at € 20 each, you get 5 BTC.

In total, you got 50 BTC.

You did spend € 400 but instead of getting 20 BTC a cost of € 20 per BTC (if you waited for the 4th week), now you have 50 BTC with a unit price of € 8 per BTC.

Conclusion: You have more BTC, at a lower average cost, by not waiting until the 4th week.

In real life, the market goes up and down, and often has very high volatility. DCA will therefore be a series of scenario 1 and scenario 2 following one another.

By adopting DCA and spreading your buying at regular intervals, you can:

  1. detach your savings from your emotions, and
  2. start early without fear of market going up or down.

The longer the DCA, the smoother the averaging, and the more profitable it can become.

For example: If we group scenario 1 and 2 above, for a total of 8 weeks, first with the price going down to € 1 then back up to € 20, you spent € 800 in total, and have 225 + 50 = 275 BTC (instead of 200 BTC at a cost of € 4 per BTC if you spent it all on the 1st week). This represents an additional amount of BTC (or a discount on the average price) of 37.5%!

On a long enough timeline, the total of "bull" and "bear" markets (price going up and down) will more or less balance each other, and the total cost of your BTC will be as if you bought at an average price, always lower than your highest price.

Another advantage of DCA is to match perfectly with a regular income, to allocate a percentage of this income to long term saving or investing. As you know, you should only invest what you can afford to lose completely (or in the best case scenario, what you will not need for a very long time!), so allocating a budget to DCA as a percentage of your income can be the sensible option, as it prevents you from making wrong emotional decisions because of market fluctuations.

Note: Butanuki offers a tool to simulate how regular intervals investments of even the smallest amounts (a coffee or a pack of cigarettes) can add up to a large savings over the years if you simply put your money in a piggy bank, and how it translates in Bitcoin's price, based on the fluctuations of its exchange rate during this time.

You can test multiple scenarios here:

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