This December has been quite an eventful while the Bitcoin price fell from $57,000 on 1st Dec to $49,200 on 06 Dec. Three other lows were recorded on 11 Dec ($47,300), 14 Dec ($46,700) and 18 Dec ($46,300). It is now around $47,000. Many people had fomo-ed in above $60,000 around Oct-Nov and now are in the red.
But don't worry, Bitcoin and Ethereum are great long-term investments. Taking it back to December 2017 when Bitcoin was around $17,000 and Ethereum was $1,450 in Jan 2018. Those prices would be a steal now.
The power of DCA and buy the dip - lower your cost basis
Some people may argue that BTC and ETH are special. This has some merits. Yes, it is correct that not all the top projects back in 2017/2018 have surpassed the previous all time high records. Aside BTC / ETH, we can see LTC, ADA and a few others have managed to do so. But now I show you, even when a project hasn't returned to its previous all time high, it doesn't mean all the holders are in the red.
Take BCH as an example ( I personally don't like BCH, but for the sake of this post, make an illustration). This coin reached ATH on 20 Dec 2017 at $3,785.82. It is now $431.03 (down 88.6%).
You may think that the vast majority of holders are now making significant losses? Not quite. Even at this price, 66% of holders are still in profits.
A word of warning though - this only considers legitimate projects, so it is still important to do the research. Crypto verse is changing so fast.
How exactly does lowering the cost basis work?
Let's say you fomo-ed in BCH, putting $1,000 in Dec 2017 at the purchase price $2,500. If you do nothing, your cost basis is $2,500 @ 0.4 BCH, and you are now down 82.76%.
However, if you bought in the following year, the same $1,000 would purchase a lot more unit. Say, for example:
- You bought another $1,000 one year later, in Dec 2018. The price was $90, thus you added 11.11 BCH. Your cost basis is now ($1,000 + $1,000) / (0.4 + 11.11) = $173.75 for 11.51 BCH.
- Let's say you bought another $500 one year later, in Dec 2019. The price was $187, you added 2.67 BCH. Your cost basis is now ($1,000 + $1,000 + $500) / (0.4 + 11.11 + 2.67) = $176.30 for 14.18 BCH.
With the current price of $431, you're now sitting on ($431 - $176.3) x 14.18 = $3,611 profit. Even though $431 is much lower than the price you bought on your initial purchase.
Effects of staking and passive income
As you know, you could earn passive income by staking and interest on Celcius or Binance etc. That will in turn lower your cost basis further.
Never underestimate the power of compounding interest: (1 + r)n
If it's 10% over 2 years, daily compounding: (1 + 0.1/365)365x2 = 1.2214 - almost 9/40 added
Over 5 years? 1.6486 - almost another 2/3 added
Tldr;
Don't panic sell when things are in the red. If you believe in a project in the long-term, DCA and buy the dip to lower your cost basis. Utilize the power of staking and compounding interest, the future will pay off.
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