Disclaimer: this article is provided for general information purposes only and does not constitute financial, investment, tax, legal or accounting advice. Also, keep this article out of the reach of children and pets, unless you print a hard copy and crumple it up for your cat to chase around.
Not long ago, a friend of mine asked me “What is dollar-cost averaging?” (they were asking in the context of buying bitcoin as a long-term hedge against inflation.)
I smiled, nodded, and replied, “Yes.”
This is my standard answer when I’m asked a question for which I have no answer. Apparently this is how my mind works when I google my brain and come up with a 404 page not found error.
But later that day, I was able to give my acquaintance a much more useful answer to their question. And, if I could get a grasp of what dollar-cost averaging is during my lunch break, I am confident you can do the same before the end of this article.
Ready? Here we go!
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 $12,000 dollars to invest in a calendar year. (Yes, I chose an amount of money easily divisible into 12 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 $12,000 to purchase $1000 of an asset every month for twelve months.
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.
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.
Buying bitcoin with a DCA strategy
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.
This DCA strategy is the basis of Bitcoin Well’s Bitcoin Savings Plan for individuals and businesses. When you set up a Bitcoin Well BSP, you automatically get a dollar-cost averaging strategy built to get the most out of your bitcoin purchase. And if you are a business owner, you can set up a corporate BSP and offer it to your employees as a unique benefit and sweet recruitment perk.
Dollar-cost averaging is a handy long-term investment strategy that helps mitigate the risks associated with an asset’s market volatility. DCA is easy to implement and maintain, making it a great option for people who aren’t able (or don’t want to) constantly ride herd on their vested interests.