Within the Bitcoin community, dollar-cost averaging (DCA) is the most frequently recommended investment strategy for building a position. In this article, we’ll discuss what it is, how it works, as well as some of the pros and cons.
DCA, Ideal for Volatile Assets
As you’re probably aware, Bitcoin can be very volatile. As an asset tradeable 24/7 around the world, it experiences daily and hourly price fluctuations. Similar to other types of investments, this volatility triggers the key emotions that drive financial markets: fear and greed. Often when prices goes up, investors get FOMO (fear of missing out) and pile in, however when it goes down, they get scared and capitulate. This often results in investors buying at the top and selling at the bottom – a bad investment strategy if ever there was one.
In a perfect world, we would all be able to buy low and sell high. But in reality, almost nobody is able to do that with any degree of consistency. For this reason, investors are often advised that it is not about “timing the market” as much as it is “time in the market”.
Whatever the investment, but especially in volatile assets such as Bitcoin, a DCA strategy is often recommended. DCA is probably the right choice if you believe that your investment is going to appreciate in the long term, and you expect price volatility along the way.
DCA is a long-term strategy, where an investor regularly buys smaller amounts of an asset over a period of time, no matter the price. The DCA schedule can change over time, depending on one’s goals.
To illustrate, an example would be if someone bought $1,000 worth of Bitcoin every month for a year as opposed to investing $12,000 upfront.
The Benefit of DCA
DCA is an easy way to avoid concerns about market timing or the risk of investing a lump sum at a market top. It can help investors enter a market slowly, and position themselves for long-term price appreciation. It averages out the risk of downward price movements in the short-term and strips emotion from the investment – that way you don’t FOMO in or capitulate if the price collapses. In fact, DCA can be done on a “set and forget” basis where it operates in the background and you never need to lift a finger once set up.
The important piece to get right is to make sure that the amount is affordable and that you continue to invest consistently. In doing so, you average out the cost of purchases and reduce the impact of sudden price drops.
Is there a chance that investing a lump sum could perform better in the long run? Of course, but it comes with risks and is generally not advisable.
To understand the power of DCA, play around with this Bitcoin DCA calculator and see where you can end up by investing small amounts, consistently over a long period of time.