Dollar Cost Averaging (DCA) is a strategy to buy bitcoin with a fixed amount of fiat currency frequently, regardless of the price.
For instance, an individual may set aside $100 of their monthly paycheck to buy bitcoin, say, for example, each and every month. We can also use the DCA strategy with a lump sum, which you then divide into smaller portions and then choose how frequently you want to buy bitcoin. If bitcoin falls one month, they’ll buy more bitcoin with their fixed amount. If bitcoin rises, they’ll only be able to buy less bitcoin.
Over time, the strategy averages the price at which the investor gets into bitcoin across each entry point (hence the name Dollar Cost Averaging). The strategy will not make you rich quick. Instead, the DCA strategy is a long-term play on bitcoin, requiring patience to reap the rewards. You can simulate Dollar Cost Averaging strategies using this website.
For instance, if you purchased $20 of bitcoin every week for the past year, you would have invested $1,060 and your holdings would be worth $1,619, appreciating 52.80%. One effective way of implementing a DCA strategy is to use Bitwage, which lets you receive a proportion of your wages in bitcoin.
The advantage of the DCA strategy is that it abstracts away from trying to time the market, which can be notoriously difficult. Traders usually wait for a low point in the price of bitcoin before going all-in and buy a large amount so that they can maximise their profit potential. However, inexperienced traders may buy too early (or too late) and/or panic sell if the price turns south.
On top of the difficulties with timing the market with an all-in position, the wildest price gains for bitcoin are usually confined to just ten days of the year. The DCA strategy will ensure that you are exposed to the price gains during these ten days, as you will be acquiring bitcoin continuously every week or month.