With its amazing ability to negate borders, add "real" diversification to an investor’s portfolio, while performing the function of a medium of exchange and a store of value, bitcoin is emerging as a new asset class. The currency is being increasingly seen as a lucrative investment option around the world.

Some of the trusted investment options for investors are Bitcoin IRA (approved by the IRS), which allows for bitcoins to be added to a retirement portfolio, Grayscale Bitcoin Investment Trust (GBTC), which is traded OTC (filed with SEC for a NYSE listing), and ARK Investment Management’s ETF (ARKW), which has a small allocation to bitcoin.

Fighting Price Volatility

One major concern is the price volatility of bitcoin.

Investors can cope with this by implementing a Systematic Investment Plan (SIP) based on the investment technique of Dollar-Cost Averaging.

Here’s how it works –

Instead of buying bitcoins via an investment product or on an exchange with a lump sum amount, investors can buy the currency for a smaller fixed amount on a regular basis regardless of the price at that time. Buying bitcoins with a pre-decided amount on a regular basis means that the investor gets more of the cryptocurrency​ when the price is lower and vice versa. This approach helps to smoothen the ups and down in the price stream, thereby reducing the risk posed by unpredictable movement in price. Some of the advantages of such investing are:

  • It inculcates discipline
  • It eases concerns regarding the right timing of buying an asset
  • Offers convenience and less commitment in terms of the amount of money
  • It tends to bring down the average cost of buying based on the principle of dollar-cost averaging which can boost the opportunity to profit over time

Consider the example of an investor buying bitcoin in 2012 on the first day of every month. By the end of the year, his average buy price for bitcoin would have been $7.75, higher than the lowest price at $4.22 during the year, but much lower than the highest price of $13.7. During 2013, his average buy price would have been just $166.52 against the highest price of $1147.25. This technique works particularly well in times of high volatility, the year 2013 being the perfect example. Similarly, for the years 2014, 2015, and 2016, the average monthly price works much better vis-à-vis the price trend of the cryptocurrency. The average holding price over this five-year period works out to be $307.40.

Lowest

Highest

Average Price

2012

$4.22

$13.70

$7.75

2013

$13.28

$1147.25

$166.52

2014

$309.87

$951.39

$545.11

2015

$177.28

$465.50

$265.95

2016

$358.77

$978.01

$551.69

Unocoin, an Indian exchange, was the first exchange to introduce a Bitcoin Systematic Investment Plan.

In the U.S., investors looking to invest in Bitcoins for a longer term without having to go through the hassle of its safe-keeping can consider buying a Roth IRA offered by Bitcoin IRA called SIPBIT. With a maximum contribution limit of $5,500, investors can allocate $230 fortnightly or $460 on a monthly basis (figures rounded up) to their Bitcoin Roth IRA account. A bitcoin denominated Roth IRA offers a tax-efficient and convenient way to invest in bitcoin with a long-term perspective.

The Bottom Line

Investing a smaller amount of money toward bitcoin in the modern day is a smarter way to invest and hold the cryptocurrency. It is a great way to ride the swings in price while adding a newer asset class to a portfolio. Investing at regular intervals doesn't just brings discipline in investment, it also offers convenience, flexibility and better returns over the long-term by bringing down the average cost of buying, all at a lower risk.

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