Anybody who invests money, whether the investment is a mutual fund, stock, or cryptocurrency, will tell you that investing involves a certain amount of risk and reward. It can be just as much a gamble as placing a wager at a roulette wheel or with a bitcoin sportsbook.
One of the keys to succeeding in both investing and in gambling is to manage one’s bankroll. There are many strategies and ways to do this. One of the most popular methods to managing risk however relates to a concept known as dollar cost averaging.
What is Dollar Cost Averaging?
Dollar cost averaging is essentially the practice of averaging out a potential buy-in or desired level of investment over a period of weeks or months instead of investing an entire lump sum at one time. The goal in practicing dollar cost averaging is to lessen the effects of volatility in the short term while still achieving one’s investment goals in the long run and investing in a way that ensures the desired amount of exposure to the market and thus, the desired level of risk versus reward.
Gambling on Bitcoin, Hedging Risk with Dollar Cost Averaging
PlanB is the username of a Twitter user known as one of the whales/leading investment advisors in the Bitcoin space. PlanB is also known as the individual who created a popular hypothesis surrounding the future price of Bitcoin. The stock-to-flow pricing model. The stock-to-flow hypothesis posits that a reduction in the new supply of Bitcoin over time, accelerated by the Bitcoin halving event which happens approximately every four years, will continually cause the price to increase in the long run.
PlanB notes that anybody who invested in Bitcoin using a sliding scale system from 2017 up until this year would have yielded returns as high as 70% over that period of time. Considering the average annual return in a well-diversified stock market portfolio or real estate investment is usually around 10%, getting seven times that return through dollar cost averaging a position in Bitcoin is a massive profit.
The 70% Return Bitcoin Gamble
Here’s how the strategy works: An investor buys Bitcoin in 2017 as the price rises, slowly increasing their investment. As the price hits its peak at the end of the year, regular increments of investing would continue, but the amounts would be lowered as the price drops (which is what a smart investor would definitely do given how much hoopla there was surrounding Bitcoin and the fact that the excitement reached a ridiculously high level).
Consistently investing throughout 2018 while lowering the monthly amount (or whatever payment frequency you chose, and then again scaling your investment up throughout 2019 would have yielded a 70% return over three years on your total principal investment.
You would have spread out your gamble over a period of three years and seen your bankroll go up considerably.
Can Bitcoin Gamblers and Investors Keep Dollar Cost Averaging Going Forward?
As they say in investing and in bitcoin gambling: Past history doesn’t necessarily dictate future results. So the big question is, can those considering going big on Bitcoin use a dollar cost averaging strategy going forward and still be successful?
The answer to that question has to be a resounding yes. While Bitcoin is relatively new to the investing and gambling scene in comparison to other forms of both activities, the concept of dollar cost averaging has always been a tried, tested and true method of managing risk versus reward.
Think about it logically, is it better to dip one’s toe in the water and slowly get into the water as you realize there are sharks swimming around you? Or is it better to jump in head first and let the sharks see you alive?
Clearly the better approach is to manage risk. In investing and in gambling, it’s not just picking the winners that matters. It’s surviving long enough to learn and having money left to continue investing in Bitcoin once you know what you’re doing. That’s partly why dollar cost averaging works so well.
Invest in Bitcoin over time. Manage the volatility, and reap the rewards in the long run rather than maintaining a short-term focus. That’s the key to success.