“I’ve tried to time the bitcoin market but DCA works best for me.”
“Gonna set up a small DCA bitcoin purchase with every paycheck.”
“Some exchanges will allow you to dollar-cost average your bitcoin purchases.”
Definition(s) from the Web
- Bitcoin is much more volatile than some other assets. This can be good when the price is rising but bad when the price is falling. One way to deal with this is to only hold a certain percentage of your savings in bitcoin and the rest in more stable assets. You could also deal with it by studying bitcoin’s fundamentals deeply so that temporary price drops do not scare you into selling low. Investing with a dollar-cost-averaging strategy can also reduce the effects of volatility. Source
- Dollar cost averaging (DCA) is an investment strategy that aims to reduce the impact of volatility on large purchases of financial assets such as equities. Dollar cost averaging is also called the constant dollar plan (in the US), pound-cost averaging (in the UK), and, irrespective of currency, unit cost averaging, incremental trading, or the cost average effect.
By dividing the total sum to be invested in the market (e.g., $100,000) into equal amounts put into the market at regular intervals (e.g., $1,000 per week over 100 weeks), DCA seeks to reduce the risk of incurring a substantial loss resulting from investing the entire lump sum just before a fall in the market. Dollar cost averaging is not always the most profitable way to invest a large sum, but it is alleged to minimize downside risk. The technique is said to work in markets undergoing temporary declines because it exposes only part of the total sum to the decline. The technique is so called because of its potential for reducing the average cost of shares bought. As the number of shares that can be bought for a fixed amount of money varies inversely with their price, DCA effectively leads to more shares being purchased when their price is low and fewer when they are expensive. As a result, DCA possibly can lower the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time.
However, there is also evidence against DCA. Finance journalist Dan Kadlec of Time summarized the relevant research in 2012, writing: “The superior long-term returns of lump sum investing [over DCA] have been acknowledged for more than 30 years.” Similarly, decades of empirical research on DCA have found that it generally does not function as promoted and is usually a sub-optimal investment strategy.
Some investment advisors who acknowledge the sub-optimality of DCA nevertheless advocate it as a behavioral tool that makes it easier for some investors to start investing a lump sum. They contrast the relative benefits of DCA versus never investing the lump sum. Source