MCS | When Should I Buy Bitcoin? — A Simple Way to Mitigate Price Volatility

MCS | When Should I Buy Bitcoin? — A Simple Way to Mitigate Price Volatility



Greetings from MCS, the derivatives trading platform where traders ALWAYS come first.



- This post has been written by Eden Au.


Eden Au is a Ph.D. student at the University of Edinburgh, majored in machine learning and climate modeling. He is also a writer and a cryptocurrency trader.


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More and more people are investing in Bitcoin everyday. We can see the number of addresses holding no less than 1 Bitcoin keeps rising.


But what stops people like you from buying your first Bitcoin? Cryptocurrencies are volatile assets, and volatility stops people from buying the asset. Price can drop and rise 10% in a few hours. No joke.


So when should you buy Bitcoin? This is crucial for retail investors like you and me who don’t have a huge sum of money. We can’t afford to lose.


How to Time your Buy-in? The simplest answer is— you don’t.




Dollar-cost Averaging


Dollar-Cost Averaging (DCA) is a common strategy to accumulate Bitcoin, and is gaining momentum in the cryptocurrency world. Instead of taking risks and speculating on the Bitcoin price, you spend the same amount of dollars on Bitcoin every month (or every week, or every day), regardless of the price.


For instance, you buy $10 dollars worth of Bitcoin every day regardless of the price. You would probably miss out when the price hits the bottom, but it mitigates the impact of volatility on purchasing a huge amount of Bitcoin at once. It would also stop you from any impulse purchase.


Naïve DCA is the easiest risk-averse strategy to gradually accumulate Bitcoins. Nevertheless, sometimes you might sense that the price is too high, and you would want to avoid buying Bitcoin that day.


While it is usually not a good idea to let your emotions drive your investment decisions, we could rely on some technical indicators to signal your buy-ins. You can then tweak your strategy a little and buy say $10 worth of Bitcoin only when the asset is considered ‘oversold’.


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Conditional Dollar-Cost Averaging


Let’s take the relative strength index (RSI) as an example. It is typically used on a 14-day timeframe, and measured on a scale from 0 to 100. Traditionally, the asset is considered oversold when RSI is lower than 30. Therefore, if you might leverage this ‘buy signal’ and only employ dollar-cost averaging when RSI < 30.



In fact, this conditional DCA strategy usually performed better than naïve DCA. The plot above shows the average cost in USD per Bitcoin should you have started buying Bitcoins at different times using naïve DCA or various conditional DCA tactics.


Even if you started employing naïve DCA at the end of 2017 during the ‘cryptocurrency bubble’, which is probably the worst time to invest in cryptocurrencies, the average cost of Bitcoin accumulated is no greater than $7,000. The price of Bitcoin at the time of writing (May 2020) is hovering around the $9,000 region.


From another plot shown below, you could visualize the return on investment (ROI) should you start accumulating coins at different times with various strategies. A zero ROI means breaking even. In hindsight, ROI is positive no matter when you started employing DCA strategies.




The downside of conditional DCA strategies is that the conditions that you come up with might be too stringent such that it does not happen frequently. Take the above-mentioned RSI as an example, RSI < 30 only happened ~10% of the time in history. This is not ideal for budgeting.








Price volatility should not stop you from investing in the future. Many Americans already bought Bitcoin with their stimulus cheques from the government.


Caveats: the past does not predict the future. You should do your own research before investing in cryptocurrencies.






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