You probably heard about this strategy, but what does it mean in practice?
And which type of dollar cost averaging strategy is the best?
In practice it means buying Bitcoin , stocks, commodity and so on every week or month at the monday, sunday, at the start of the month or at the end, not caring about the price.
You can also choose one random day in a month, when you make your purchase, more about that maybe in another Idea.
An example of dollar cost averaging can be found below backtests.
In this test I've compared buying Bitcoin at
- weekly opens (Monday open) eg. 06 Jan 2020
Average buy price in 2020 - $9,255
- weekly closes (Sunday Close) eg. 12 Jan 2020
Average buy price in 2020 - $9,361
So buying at the weekly close or at weekly open are both a good idea, but buying at open each week has a bigger return of investment than buying on close by 2%.
- monthly opens (First day in the month) eg. 01 Jan 2020
Average buy price in 2020 - $9,245
- monthly closes (Last day in the month) eg. 31 Jan 2020
Average buy price in 2020 - $9,827
Here we can see a bigger difference, while buying Bitcoin at open would gave you average price per BTC of $9,245, Buying at close would make your average buy $600 more expensive, 8% smaller yield.
To see if this trend also occurs in the last year, I've calculated also a year 2019 with monthly values.
It turns out, buying on open is here cheaper again, while buying Open would give an average of $7,022.
Buying at close would make average buy of $7,287, small difference but very noticeable in long term.
I am starting to buy Bitcoin for 15% of my gross monthly income (let's say 500$) from first january at weekly open starting from 01 January until today.
How much would I have today?
Average buying price - $9,255
Current Bitcoin price - $13,180
Yield - 13180/9255 = 1,424 = 42,4%
Deposits - 42 per $500 = $21,000 in past value
Value = 21000 x 1,424= $29,904 in current value
Buying this year at open would give a very slight 0,1% increase in yield, so both buying at weekly open or monthly open is a good idea, maybe another time I can cover some random days in a month!
This strategy also works for stocks, and etc.
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