Dollar-Cost Averaging with Bitcoin

I hope that everyone is doing well. I apologize for my absence from posting on the Two Investing blog. However, Scott and I were discussing Bitcoin recently, during which we had some good laughs about my Bitcoin investing, and Scott mentioned that a Bitcoin update would be a great blog post since the Bitcoin landscape has changed significantly since my first Bitcoin post in 2014. I also thought that maybe with this post I could finally convince Scott to make his long overdue first Bitcoin investment.

When I made my first purchase of Bitcoin over two years ago, Bitcoin itself was in the midst of a large amount of volatility and uncertainty, even by Bitcoin standards. However, I felt that Bitcoin was incredibly interesting and the blockchain technology underlying Bitcoin potentially transformative in its ability to create a distributed network of trust with many exciting applications. Having invested in Bitcoin and spent time learning about blockchain technology over the past two years, I remain enthusiastic about the potential for both going forward.

I placed by first Bitcoin buy order on February 24th, 2014 when the price had dropped below $500 after reaching a peak of over $1000 per Bitcoin only a few months prior. I only bought a small amount of Bitcoin to start off with, but I was excited to own a small piece of what was in my mind a neat new technology. Over the next few months, the price of Bitcoin slowly trended downward, and I decided to make regular small purchases of Bitcoin every 2 weeks or so over that time. Of course, it never feels good to see the price of an asset that you hold decrease, but, at the same time, I enjoyed learning about new companies in the Bitcoin space as they launched and seeing how Bitcoin and blockchain technology were covered in the media over that period.

The lowest price that I was ever able to buy Bitcoin at with my Bitcoin dollar-cost averaging approach was $195.56 on January 14th, 2015. At that time, even though Bitcoin had been written about and discussed a lot over the previous year, it was definitely hard to find any real positive things being said about Bitcoin in the popular press. In fact, for me, as someone who is on the outside of the Bitcoin development community, it was often difficult to find much news at all about Bitcoin other than on Bitcoin-specific websites; it seemed to have disappeared from active discussion in the popular press almost altogether. However, I continued to research my investment and learn as much as I could about it despite the price decline. In doing so, I felt stronger and stronger that this was an opportunity to invest in a technology with significant potential going forward. That is how I became a long-term holder of Bitcoin and continue to be today.

I am a believer in Bitcoin and blockchain technology, but I am not naive about the risk that this entails. Bitcoin and blockchain technology are complex, and it is definitely very possible that, with many of the current issues within Bitcoin and its underlying protocol that are being actively debated in the Bitcoin community (e.g. the Bitcoin block size debate and the division it has caused in the Bitcoin community, “hard forking” both in Bitcoin and another blockchain distributed ledger called Ethereum, barriers to Bitcoin acquisition and finding a use case for Bitcoin for the mainstream public, the thin markets and low volume on even the biggest Bitcoin exchanges in the world when compared to the transaction volumes seen on even small assets traded on the NYSE, Nasdaq, BATS, etc.), Bitcoin as a technology and an asset does not succeed. This would almost certainly translate into a very large if not complete Bitcoin price decline. As such, I have diversified my investments to account for this uncertainty, and I am comfortable with this level of risk in my portfolio. Many people feel that the future of Bitcoin is binary in that it will either fail completely or be truly transformative. Others believe that it has a place and a role in the worldwide financial marketplace that is not just all or nothing. We will see what happens with time. However, for me personally, Bitcoin has been an enjoyable investment, one with a lot more excitement beyond the normal company news and the next quarter’s earnings report for more standard investments, and I am always excited to see how I can add to my investment in new ways as the technology evolves.

One of the biggest questions with Bitcoin that remains for the general public often is: how do you buy or obtain Bitcoin? I’ll write another follow up post soon detailing the resources that I have used over the past two years to buy Bitcoin, including how I receive a portion of my biweekly paycheck in Bitcoin even though I do not work for a Bitcoin company or a company that offers direct Bitcoin payments. Maybe once Scott has heard some of the details of these resources, he will consider buying some Bitcoin, especially now that he is pursuing some more speculative investments with his Schwab Global Investing account!

Disclosure: Long Bitcoin (BTC) and Ether (ETH).

7 Responses

  1. I obviously always hear about bitcoin, but do not know enough about it and how it works. Looks like its back up there in the high $500s so good for you! Really look forward to your follow up post!
    The Dividend Mogul recently posted…July Dividend IncomeMy Profile

  2. scott says:

    Johnny,

    Great post. I never knew that Bitcoin dropped to $195 as recently as January 2015. Wish I would have bought some then. You mentioned that there will soon be an ETF specializing in Bitcoin. Will that fund basically mirror the value of Bitcoin? Or, how will it make money? I’m not really one for investing in gold stocks, ETFs, or physical gold because they do not generate profits and are more a hedge against other currencies than anything else. (However, I am definitely not averse to buying the small companies that mine the gold and other minerals…some are quite the steal today!)

    Scott

  3. FerdiS says:

    Great to see a post from you, Johnny! I know nothing about Bitcoin so this was quite informative!
    FerdiS recently posted…Recent Buy: Cisco SystemsMy Profile

  4. Ross says:

    I recently heard a Planet Money podcast (http://www.npr.org/sections/money/2016/06/29/484029238/episode-708-bitcoin-divided) where they discussed the current wait-time in confirming transactions, describing it as taking a few hours to possibly even days, and the community-as-a-whole’s inability to implement any technical solutions to the problem despite some apparently being available. The podcast made it seem as though the intractableness of the situation was a result of misaligned (and not necessarily correctable) incentives between the miners and the rest of the community.

    Assuming the podcast wasn’t out of line in stating the scale of the problem — I wonder if there is reasonable hope for a community-acceptable solution or, if not, what the future looks like for a currency whose success begets a downward pressure on its usability in a wide range of situations.

    I’ve tried reading a bit about Ethereum and Ether and have to admit that I’m no closer to understanding (but will keep on trying!) — but do you feel that it addresses some of the ostensible weaknesses of Bitcoin? It is a possible successor, a competitor, or something that can exist completely independent?

    Side note: If/When quantum computers become viable, it seems that the cryptography behind Bitcoin will become vulnerable. Again there appear to be some possible solutions to this but it’ll be interesting to see how it is handled by the community — reacting against an existential-threat versus the possibility-of-slow-death represented by the wait-times. Though, to be fair, in this quantum computer scenario, Bitcoin will definitely not be alone in that boat.

    Anyway, interesting stuff — looking forward to the post about how to buy and obtain Bitcoin!

    • scott says:

      Great comments, Ross. Hopefully Johnny will address some of them in his next post. The cryptography thing and quantum computing is very interesting! I wonder if much has been written about that yet?!

  5. Ross says:

    Obviously, the increased success of Bitcoin wouldn’t necessarily make wait-times longer — perhaps at some point we would pass a threshold and others would dedicate computational power to the process (in exchange for transaction fees or whatever) at a rate that outpaces the stress put on the system — but perhaps not.

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