Disclaimer: The content of this article is not investment advice.
Dollar-cost averaging (DCA) is a term that will already be familiar to many investors. The concept is relatively simple: instead of making a single lump-sum purchase, you periodically buy a fixed dollar amount of whatever asset you want to accumulate.
Feel free to substitute dollars for your currency of choice – euros, Vietnamese đồng, Clubcard points, etc. Just don’t expect me to start using “pound-cost averaging” (it just sounds wrong).
Bitcoin is notorious for its price volatility, with double-digit percentage daily swings being relatively common. At first glance, using DCA to smooth out turbulent price action would seem to be a sensible idea. However, as a scrupulous individual, you will appreciate that a single glance seldom provides sufficient information to make an informed decision.
In this article, we’ll take a closer look at some of the arguments for and against Bitcoin DCA, with a little bit of help from Twitter.
First, let’s look at the financial implications of dollar-cost averaging.
Making a lump-sum purchase on any particular day leaves you exposed to the chaotic short-term movements of the market. It is possible that you get lucky and buy bitcoin at the perfect time and that the price never again dips below your entry point. However, it is equally plausible that you will buy a local top and watch with dismay as the value of your bitcoin slumps. It is a little bit like rolling a single die – it is equally likely to land on a 1 or a 6.
The important point to recognise here is that short-term price action is chaotic and extremely difficult to predict. Even professional traders get it wrong much of the time. Instead of falling into the trap of trying to time the market, we are probably better off accepting the basic fact that we can’t. This is where DCA comes in. Returning to our previous analogy, the average result of rolling 100 dice will almost certainly be 3 point something, provided the dice are fair (try this at home if you’re bored, or set your kids a challenge!). Not amazing, but certainly not disastrous.
When you buy a fixed amount, say $10, on a weekly or monthly basis, you will inevitably end up buying dips, tops, troughs, and plateaus. Your average acquisition cost will reflect the overall price trend during the period, rather than a single snapshot in time. The higher the frequency of your buys, the closer the tracking. In fact, your average acquisition cost will tend to be below the average price because your $10 will buy more bitcoin when the price is lower and less when the price is up. This is the “magic” of DCA. (If you really wanted to, you could achieve an average acquisition cost equal to the average price by committing to regularly buying a fixed amount of bitcoin, irrespective of the dollar price).
Given the above, why did my Tweet receive comments from bitcoiners vehemently advocating for a lump-sum approach? Is there some logic underlying this stance?
The logic is actually quite simple. Whilst the rate at which you can convert fiat currency into bitcoin fluctuates wildly when viewed on the daily or weekly chart, if you zoom out, the long-term trend is difficult to ignore (spoiler alert: up). With the important caveat that past performance is not indicative of future results, if you suspect that this trend will continue and you happen to have a large pile of cash lying around, the rational course of action is to exchange it for bitcoin sooner rather than later. The opportunity cost of not doing so may be prohibitively high. Furthermore, with an exponential outlook, you become less sensitive to short-term “noise”. If bitcoin reaches $1 million, will it really matter whether you bought at $60k or $40k?
However, for those without significant savings, setting aside a portion of each paycheque to DCA is probably the way to go.
When it comes to matters of money, you ignore human psychology at your peril. Making financial decisions without a plan is a recipe for disaster, leading to irrational exuberance when the price increases (a.k.a. FOMO), panic-selling at a loss, and wasting far too much time compulsively checking charts. For others, buying bitcoin for the first time can seem like a daunting experience. Committing to a DCA plan removes much of the stress and second-guessing, especially if you can find a way to execute that plan automatically.
By “paying yourself first”, you are also less likely to succumb to frivolous spending that you will later regret, as eloquently described in the tweet below.
These days, setting up a DCA plan is ridiculously easy with services like Bitcoin Auto Buy from CoinCorner. Simply register for a free account, set up a standing order for as little as £10, and choose how often you want to buy bitcoin. That’s all there is to it.
As strange as it might seem to the uninitiated, regularly buying bitcoin is a way of life for a growing number of people. Bitcoin is viewed not just as an investment, but as a vote for a fairer monetary system that will produce the conditions necessary for human flourishing. But don’t worry if this moral argument doesn’t cut it for you – there is nothing wrong with buying bitcoin simply because you want to increase your future purchasing power!
Miscellaneous arguments against DCA
Most forms of dollar-cost averaging will involve signing up to a regulated bitcoin exchange, which means providing know-your-customer (KYC) information, linking you to your bitcoin. One interesting no-KYC alternative is home bitcoin mining, though this may not be economically favourable given domestic electricity rates in the UK!
It is also possible that you are a bitcoin “whale” from the early days and simply don’t need any more!
As we have seen, DCA can be an effective way to take the stress out of buying bitcoin, though historically it tends to underperform a lump-sum investment due to bitcoin’s relentless, if hair-raising, upwards trajectory. In my opinion, dollar-cost averaging should be viewed as a powerful tool that can be deployed effectively in a wide variety of circumstances.
- Ready to make a significant buy, but concerned about timing your entry? Consider spacing your buys over a period of months to smooth out volatility.
- Working a regular job and want to buy bitcoin regularly? DCA is for you.
- Simply dislike fiat currency? You guessed it… DCA.