Buying Bitcoin Using Dollar Cost Averaging & Avoiding Dust UTXO - Self Custody Series - Feb 2024
Watch on YouTubeVideo summary
The conventional wisdom regarding Bitcoin investment often suggests combining dollar cost averaging with the strict advice of never reusing addresses, but this approach can inadvertently lead to significant financial inefficiencies due to transaction fees. Dollar cost averaging involves purchasing assets at regular intervals regardless of price fluctuations to smooth out volatility and achieve a favorable average entry point. However, when investors strictly follow the rule of withdrawing tiny amounts every single purchase to avoid address reuse, they accumulate numerous small Unspent Transaction Outputs, or UTXOs. These fragmented outputs eventually become "dust," where the cost of fees required to consolidate them into a spendable amount exceeds the value of the Bitcoin itself, effectively eroding a significant portion of the investment.
The core issue arises from the misunderstanding that withdrawing immediately after every small purchase is necessary for security or privacy; in reality, the problem exists regardless of whether funds are sent to the same address or different ones. Each withdrawal generates at least one new UTXO, and if these withdrawals are too frequent and involve very small amounts, the wallet becomes cluttered with tiny balances that are technically unusable without paying prohibitive fees. This fragmentation creates a scenario where an investor might believe they have a substantial amount of Bitcoin in their account, but upon attempting to spend it, they discover they cannot afford the transaction fees required to combine thousands of micro-UTXOs into a single transaction, rendering the funds inaccessible until market conditions change drastically or fees drop significantly.
To resolve this conflict between investment strategy and wallet hygiene, the video proposes a nuanced middle ground that preserves the benefits of dollar cost averaging while preventing UTXO fragmentation. The recommended strategy is to continue buying Bitcoin at regular intervals but to delay withdrawals from exchanges until the accumulated balance reaches a threshold where consolidating the funds into a single UTXO makes economic sense. For instance, an investor might set a personal limit, such as waiting until their exchange balance exceeds $500 or $1,000 before withdrawing, ensuring that the resulting transaction fee does not consume a large percentage of the holdings. This approach allows investors to maintain their average cost basis over time while avoiding the creation of dust and keeping their wallet structure clean and efficient.
Ultimately, the video concludes that while the general principles of dollar cost averaging, not reusing addresses, and self-custody remain valid advice, they must be applied with technical awareness rather than as rigid absolutes. Blindly combining these strategies to their extremes results in a messy wallet filled with tiny outputs and high fees, which defeats the purpose of investing. True financial prudence involves understanding the underlying mechanics of blockchain transactions and adjusting one's behavior to fit practical circumstances. By finding a balance where withdrawals occur only when the accumulated amount is large enough to justify the transaction cost, investors can successfully implement dollar cost averaging without falling victim to fee traps, ensuring their Bitcoin remains liquid and usable for future needs.
Read the full video transcript
stone door says does the conventional
wisdom of dollar cost averaging and
don't reuse addresses need to change
people with many small utxos seem
screwed as fees increase um Stone so
glad you asked that because this is a
very very critical issue that has gone
unnoticed by many and is not being
discussed and a a as you say the
conventional wisdom has misled a lot of
people into making this
mistake so dollar cost averaging means
that it's best to buy your Bitcoin um at
regular time intervals regardless of
price so rather than putting in a
lumpsum or whatever you have now um
putting in a bit at a time say investing
every Monday afternoon regardless of
what the price is doing will give you a
better on average price uh the dollar
cost average meaning your cost bases in
dollars for the acquisition of that
asset and it's a technique that Traders
use in many many different
assets um not reusing addresses has more
to do with um privacy and security uh
than anything else but often people
combine these two
things the problem comes when people
don't understand the next important step
which is just because you bought the
Bitcoin every Monday doesn't mean you
also withdraw it immediately so the
problem isn't combining DCA and don't
reuse addresses the problem is combining
very small amount DCA and a address
reuse advice with my advice of not your
keys not your coins don't leave money on
exchanges and instead what you do is you
buy every Monday and then withdraw every
Monday and honestly it doesn't matter if
you withdraw to the same address or not
um because the problem of utxos exists
whether they're in the same address or
not it doesn't really matter um each
withdrawal will be a
at least one possibly more but hopefully
just one uh utxo and if you're
withdrawing every money the every Monday
the tiny amount that you just
DCA um you're going to pay a fee for
that withdrawal but then you're also
going to end up with a pretty small utxo
sitting in your address same address
different address doesn't matter you
still have a small
utxo um and
so you end up with this fragmentation
you end up accumulating dust and then
when you try to spend that you're like
oh great I have $1,000 in my account yes
but what you don't realize is that you
don't have ,000 you have
10,000 uh 10 cent utxos and to spend
10,000 10 cent utxo you need to make a
transaction with 10,000 inputs and that
transaction is going to be a jumbo
transaction a wapper of a transaction
and the fees on that are going to be
huge and you're going to end up chewing
up a significant percentage of your
investment in paying for those fees so
how do you we tweak this advice in a
practical sense right because that
doesn't mean stop dollar cost averaging
and it doesn't mean leave all your money
on a on an exchange this mean
understanding the technical nuance and
applying it
correctly and the way I would do it and
in fact the way I did do it is um if on
dollar cost averaging small amounts not
in the hundreds or thousands of dollars
and I don't want have utxos um that are
small um you know
under I I would say anything
under $500 in the current price uh
environment in Bitcoin is a small utxo
so if I don't want to have uh utxos that
small um what would I do well I can
dollar cost average every Monday but
only withdraw once the amounts that I
have on the exchange is at a a level the
balance that I have is big enough then
when I withdraw that is sent to me as a
single utxo of the total amount that
I've dollar cost still dollar cost
average my cost basis is still the every
Monday price on average you know
averaged out over however many a uh
however many Mondays I've been doing
this so I've achieved the dollar cost
average goal which is to um to smooth
out
uh rapid uh price fluctuations and
volatility uh and get a good cost in
dollars on average for your Bitcoin so
I've achieved dollar cost averaging and
and if I withdraw once my amount exceeds
my balance on the exchange exceeds I
$500 $1,000 something like that uh
whatever the number is for you uh the
number that you wouldn't cry if you saw
it disappear um but would also not
create a you txo that's too small um and
incur too large fees well then I
withdraw so you have to find that
balance what is the balance for you
whether the utxo is not small enough to
chew up everything in fees and um but
it's not so big in Balance terms that if
the exchange gets hacked you're going to
be losing all your savings right um and
so DCA and don't reuse addresses are
still good advice and and the not your
keys not your coins don't leave money on
Exchange is still good advice but no
advice is perfect for all circumstances
and just because you have advice doesn't
mean you take the maximal position of
each statement and then combine them all
to create the
maximally um best scenario that's that's
not how life works right there's Nuance
here and there's technical details you
need to understand so if you take DCA to
the extreme and you take um don't leave
money on the exchange extreme and you
take don't reuse addresses the extreme
you end up with a very messy wallet with
tiny utxo spread a lot of addresses and
very high fees ethereum and the internet
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