Bitcoin can experience daily (or even hourly) price volatility. As with any kind of investment, volatility may cause uncertainty, fear of missing out, or fear of participating at all. When prices are fluctuating, how do you know when to buy?
In an ideal world, it’s simple: buy low, sell high. In reality, this is easier said than done, even for experts. Instead of trying to “time the market,” many investors use a strategy called dollar-cost averaging (or “DCA”) to reduce the impact of market volatility by investing a smaller amount into an asset — like stocks, bonds or gold — on a regular schedule.
DCA might be the right choice when someone believes their investments will appreciate (or increase in value) in the long term and experience price volatility on the way there.
What is DCA?
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 (for example, investing €100 in Bitcoin every month for a year, instead of €1,200 at once). Their DCA schedule may change over time and — depending on their goals — it can last just a few months or many years.
Although DCA is a popular way to buy Bitcoin, it isn’t unique to that asset — traditional investors have been using this strategy for decades to weather stock market volatility.
What are the benefits of DCA?
DCA can be an effective way to own Bitcoin without the notoriously difficult work of timing the market or the risk of unwittingly using all of your funds to invest “a lump sum” at a peak.
The key is choosing an amount that’s affordable and investing regularly, no matter the price of an asset. This has the potential to “average” out the cost of purchases over time and reduce the overall impact of a sudden drop in prices on any given purchase. And if prices do fall, DCA investors can continue to buy, as scheduled, with the potential to earn returns as prices recover.