Learning Our Terms: "Dollar-Cost Averaging (DCA)"
Temper Your Inner Primate
I came across the Tweet above this week, and it was a gentle reminder that sometimes people make investing more stressful and complicated than it has to be. Or sometimes people are simply too greedy and want to get rich over night. Maybe people hear a friend talk about how much money there is to be made in cryptocurrency and they ape or YOLO in to a trade, pushing all of their chips into the pot, hoping to make life-changing money overnight. Then comes a brutal downturn in short-term price action, and they sell when an asset hits a low because they are scared the price will go even lower. This is rough and quite common, but things don’t have to be this way. And so I introduce to you our term for this edition of the newsletter: dollar-cost averaging (DCA).
This following the definition of dollar-cost averaging from Investopedia.
“Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals. In effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices. Dollar-cost averaging is also known as the constant dollar plan.”
While the above definition is relatively straightforward, let me break it down even more simply for you with an example. Let’s actually start with what dollar-cost averaging doesn’t look like. Let’s say I am interested in buying stock in Tesla. I believe that buying a share (or a partial share) of Tesla is a good long-term play because I feel that, in the long run, this asset will be worth more. So, I have $5,000.00 in the bank. The price of a share of Tesla has been on the rise the past few weeks, and I want in. So, I ape in; I throw all of the $5,000.00 at this asset. Then, the price of the asset drops precipitously soon after; I get super stressed, and I sell when my assets are only worth about $3,000.00, because I couldn’t stomach the idea of the price going any lower. This, my friends, is the complete opposite of dollar-cost averaging. That’s what the guy below would do (and while he is totally awesome, we have to be better than him, at least in a financial sense).
Employing a dollar-cost averaging strategy would look more like this:
“Hmmm, that Tesla seems like a good company to invest in. That Elon Musk guy seems pretty smart (minus his proclivity for promoting a silly digital asset with a cute dog on it). I’d like to invest in his vision. I’m going to take this $5,000.00 I have and invest $200 per week in Tesla for the next 25 weeks.”
Or to put it in even simpler terms, let’s go to the eternally optimistic Lark Davis.
And here’s what this looks like when we actually apply the numbers.
My approach has been most similar to the strategy that Sheldon mentions above. I’ve been buying digital assets consistently in small doses (and in some bigger doses here and there) for the last 3.5 years. If you have a 401k or some sort of pension, you are already dollar-cost averaging into your investments, as a percentage of money from each of your paychecks is deducted from your take-home pay and added to your retirement account. (You can actually now buy digital assets like $BTC for your retirement account by using services like Choice.)
By dollar-cost averaging, you are insulating yourself from the pain and anxiety that might come from volatile short-term price action. Plus, patience is a virtue in the world of investing. Almost no one gets rich overnight.
If you are feeling kind of fancy, maybe allot a little bit more of your hard-earned dollars to bitcoin, or whatever other asset in which you choose to invest, when the price of the asset dips considerably, and maybe allot a little bit less of your dollars to the asset when its price rises to the upside in a parabolic fashion. Actually, when the price goes up significantly, it might actually be worth skimming some profits off of the top. Investing doesn’t have to be an all-or-nothing game. In other words, it’s nearly impossible to know what the bottom or the top of the market looks like, and no one perfectly times the market so that they put all of their money in at an absolute low and take all of it out at an absolute high. So, just buy a little more when the price is lower, and buy a little less (or even consider selling a bit) when the price goes up. This is essentially the spirit of the Tweet that I shared at the opening of this edition of the newsletter. And for some even broader perspective, I will share a quote from Warren Buffett, since he is pretty good at investing…
“It’s not about timing the market; it’s about time in the market.”
So, when you feel that urge to channel your inner ape, to throw all of your saved money at a one-time trade, consider not doing so. We’re not primates any more, so let’s stop acting like them when it comes to investing.
Bonus point: You can also earn $BTC every day on all of your purchases (like I do) via a Fold debit card or a BlockFi credit card. The same holds true for using the Lolli extension on your web browser. I wrote more about Fold and Lolli in this edition of the newsletter. If you’d like an invitation to get the Fold debit card and you have my personal number, shoot me a text and I’ll send you an invite. We both get $25 in $BTC when I share a link and you sign up. Magic! I mention this because this idea of earning a bit of $BTC every day is its own version of dollar-cost averaging. I’ve been accumulating $BTC every day throughout this extended dip.
The Status of Digital Asset Markets
The price of digital assets when on an upwards tear over the course of the past seven days. $BTC and $ETH both gained about 23% in value. It’s been nice to see the assets swinging again after being tied up against the ropes for almost the past two months. As I’ve said in previous newsletters, I don’t think this bull market is over. (But that shouldn’t mean much to you because I’m not a financial advisor, and I don’t offer financial advice. Do your own research.)
Some people have attributed the jump in price the the now debunked news that Amazon will begin accepting bitcoin and other digital assets as forms of payment in the near future. Personally, my opinion is similar to that of Nassim Taleb’s (below).
I don’t think that (fake) news alone was the catalyst for the upswing, just like I don’t think Elon Musk’s environmental FUD alone was the cause for the collapse in price in May.
I tend to agree with on-chain analyst Will Clemente’s suggestion that a supply squeeze is at play. Read more on that in his newsletter here. I am also happy to share his findings (below) that show that smaller entities, people who own anywhere from 0.1-100 $BTC have accumulated more $BTC than entities who own anywhere from 100 to 10K $BTC during this extended dip. More of this asset in the hands of the plebs. This is the way.
The following two Tweets were quite bullish, as well.
Clown Talk of the Week
Elizabeth Warren gets the big red shoes for this week.
Below was the most appropriate response that I found to the above statement.
Generally speaking, I don’t dislike Elizabeth Warren. I think she tries… kind of… eh. We at least both seem to share the same distrust of banks, though, we have very different ideas about how we get out of the financial mess that we are currently in. Her approach is like that of the husband who is having an affair who continues to promise his lover that he is going to leave his wife for the lover… “C’mon baby, just give me another term, and I am totally going to do something meaningful about student loan debt and how powerful banks are.” All the while, the student loan debt inflates and the banks continue to accrue power and wealth. She doesn’t have the power to follow through on her promises; the government isn’t going to fix the financial problems that it has created. It’s mathematically impossible for it to do so without it literally hitting a reset button, which is very scary. (And please don’t pretend Dodd-Frank has done anything substantial to reform the financial industry.)
And so, her Tweet above is nothing more than a pose. Honestly, I’m indifferent as to whether or not the U.S. government takes $5.4 billion of Jeff Bezos’ wealth. Mr. Bezos is an insanely smart dude and maybe one of the greatest logisticians ever, but he is also only separated by a few degrees from a modern-day slave driver. My concern here has more to do with the fact that Elizabeth Warren thinks that bringing in $5.4 billion dollars in revenue would really do anything in an age where we print trillions of dollars at the drop of a hat. Let’s just pretend for a moment the U.S. government gets this money and applies half of it to a universal child care program and half to helping students to pay down their student loan debt (something that she said this money could be used for in another statement that she made). I don’t know enough about the child care industry to comment, but let me apply her logic to student loan debt. $2.7 billion (half of $5.4 billion) would only pay off 1.7% of the current $1.57 trillion in student loan debt. Barely a drop in the bucket. So, Elizabeth Warren, you are either woefully unaware of how little $5.4 billion does in our current economic environment, or you were just trying to appeal to your base with a weak-ass flex on someone who the U.S. government enriches by paying for his company’s cloud computing services and whose company hasn’t been taxed by the U.S. government in years. Try harder next time.
The Washington Post comes in a close second for purveyor of clown talk for this week.
Best,
Frank
Twitter: @frankcorva
Patience always pays :) great to be reminded that no one gets rich overnight even when our greed tricks us into thinking otherwise. Thank you
DCA all the way 👍 Thanks, Frank - always good to get a reminder!