Dollar Cost Averaging: The Best Way to Buy Bitcoin

Dollar Cost Averaging: The Best Way to Buy Bitcoin

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Dollar-cost averaging (DCA), a financial strategy used for purchasing assets at regular intervals instead of a one-time bulk purchase, is becoming more popular among investors due to its simplicity and ease of implementation. Market volatility is a significant factor when it comes to investments, as the unpredictability of an asset’s price fluctuating over time often makes it challenging to time the market. Therefore, DCA can help mitigate the long-term impact of market volatility, and it has been found to be an effective alternative to timing the market.

How dollar-cost averaging works

Dollar-cost averaging (DCA for short) is a financial strategy where the total amount of money being invested is used to make multiple purchases of an asset at regular intervals over a set period of time, instead of making a one-time bulk purchase.

Super easy example: let’s say you have $14,000 dollars to invest in a calendar year. (Yes, I chose an amount of money easily divisible into 14 months. You would do the same if you were writing this article. Don’t judge.)

With a dollar-cost averaging strategy, you would use your $14,000 to purchase $1000 of an asset every month for 14-Month.

Dollar-cost averaging may already be familiar to you if you’ve ever made regularly scheduled contributions to an employer’s retirement plan that leveraged mutual funds or a similar type of investment. DCA is actually a fairly commonplace investment strategy due to its simplicity and ease of implementation.

While it’s easy to understand what dollar-cost averaging is, it’s a little more complicated to figure out when and why you should use a DCA strategy.

Why is DCA a Good Investment Strategy?

DCA is a popular investment strategy because it is simple and easy to implement. You don’t have to worry about market timing or trying to predict when the best time to buy an asset is. With DCA, you invest a fixed amount of money on a regular schedule, which can help reduce the risk of investing all your money at once when the market is high.

DCA also helps to smooth out the ups and downs of the market. When you invest a fixed amount of money over time, you end up buying more shares when prices are low and fewer shares when prices are high. This helps to lower the average cost of your investment over time, which can result in a better return on your investment.

When should you use dollar-cost averaging?

There is a saying in investing circles: “No one can time the market.”

(Well, I suppose insider traders can time the market, but they often end up going to jail, so they are more of a cautionary tale than a good example.)

The point is, most financial investments come with a level of unpredictability, referred to as market volatility. Market volatility is the variation of an asset’s price as it fluctuates up and down over time. An asset that regularly sees large and frequent changes in its value has a higher market volatility than an asset that keeps a relatively constant value over time.

Dollar-cost averaging’s key advantage is that it can mitigate market volatility over the long term. Purchasing the same amount of an asset on a consistent schedule—regardless of the asset’s price at the time of its purchase—has historically been comparably effective as trying to time the market with a “buy low, sell high” approach.

The key words here are, “over the long term.” Dollar-cost averaging is not considered to be an effective short-term strategy by most financial experts. To counter the overall volatility of the global economy, DCA investors should be in it for the long haul.

For dollar-cost averaging to be effective, you should be willing to stay the course through the typical market cycles—bull markets charging at bear markets, followed by outraged bears swatting the bulls on the nose and chasing them up the nearest tree…

(I know, it’s a strange metaphor. Honestly, if you ever believe you’ve seen a bear chasing a bull up a tree, you should probably make an appointment with your eye doctor.)

Short-term deviations in the economy can reduce the effectiveness of a DCA strategy. But, when dollar-cost averaging is used as a long-term strategy, it typically lessens the impact of market volatility while providing a simple process for investors to stay the course with.

Why Use DCA to Buy Bitcoin?

Using DCA to buy Bitcoin can help reduce risk and potentially increase returns over time. Since Bitcoin’s price can be highly volatile, investing a fixed amount of money at regular intervals can help reduce the impact of price fluctuations on your investment.

Additionally, DCA can help remove the emotional aspect of investing. When investing in Bitcoin, it can be easy to get caught up in the hype and invest more money when prices are high and less when prices are low. DCA helps to remove these emotional impulses and ensures that you are investing a fixed amount of money at regular intervals.

How to Use DCA to Buy Bitcoin?

Bitcoin has a history of market volatility, which makes it an ideal subject for a dollar-cost averaging strategy. It’s kind of like having several small meals throughout the day rather than three huge meals. Split your annual investment budget into monthly sums, and purchase bitcoin on or around the same day every month.

To use DCA to buy Bitcoin, follow these steps:

  1. Set a Budget: Decide how much money you want to invest in Bitcoin and divide it into equal parts to invest at regular intervals.
  2. Choose a Schedule: Decide how often you want to invest in Bitcoin. You can choose to invest weekly, bi-weekly, or monthly, depending on your preference.
  3. Choose a Platform: Choose a platform to buy Bitcoin. There are many platforms available, such as Coinbase, Binance, and Kraken.
  4. Set up Auto-Invest: Once you have chosen a platform, set up auto-invest. This will allow you to invest a fixed amount of money at regular intervals automatically.
  5. Monitor Your Investment: Monitor your investment regularly to ensure that it is meeting your expectations. If the price of Bitcoin drops significantly, you may want to consider increasing your investment amount.

Final Thoughts
DCA is a well-liked investment approach to obtain a cheaper average purchase price per share, reduce market risks, and invest without emotion. Lump-sum investments are for individuals who want to purchase cryptocurrency at the best possible price and exit the market when the timing is perfect. Although they cannot guarantee higher returns, lump-sum investments do carry risks.

Ultimately, the best investment strategy for you depends on your unique investment goals and circumstances. It is important to consult with a financial advisor before making any investment decisions.

I am not a financial advisor, and this article is simply my personal opinion. I’ll go over a few things to think about before committing a small portion of your net worth to an alternative investment like Bitcoin. All investment decisions should be made after extensive research or consultation with a financial fiduciary.


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