What is dollar-cost averaging (DCA) and why is it popular in bitcoin?

dca bitcoin calendar

First published: 08/05/2022
| Last updated: 01/12/2023
| -- min read

Dollar-cost averaging (DCA) is a time-tested strategy for saving and investing used by millions worldwide. While useful for acquiring any asset you think will grow in value in the long run, it’s especially popular with bitcoin savers laser-focused on “stacking sats.”

Dollar-cost averaging involves establishing a plan of fixed, ongoing purchases to accumulate an asset over time. Here we’ll explain how dollar-cost averaging works, its key benefits for bitcoiners, and some trade-offs to weigh if you’re considering a DCA plan.

How dollar-cost averaging (DCA) works

Dollar-cost averaging is a long-term strategy commonly used to invest and build savings from personal income. With a DCA strategy, you purchase bite-sized pieces of a target asset on an ongoing basis (e.g., weekly, bi-weekly, monthly, or quarterly). Buying in this way spreads your purchases over a longer period, which tends to lessen the impact of short-term price fluctuations.

You typically make purchases in fixed-sized amounts—using the same dollar amount each time you buy (e.g., $50, $100, or $200 per week). Assuming the asset in question is on a long-term upward trajectory, this will cause you to buy fewer units of your target asset when the price is high and more units when the price is low. This serves to reduce the average price you pay per unit.

An example DCA strategy for bitcoin

In bitcoin, the smallest divisible unit are satoshis (or sats), 100 million of which make up one bitcoin. Consider this hypothetical one-year example where you save $100 worth of sats per month. Notice that the overall price increases substantially despite the wide price swings in between.

MonthBitcoin price (Sats per dollar) Sats purchased for $100
January$82,034 (1,219)121,951
February$35,001 (2,857)285,714
March$10,000 (10,000)1,000,000
April$59,031 (1,694)169,491
May$43,010 (2,325)232,558
June$100,000 (1,000)100,000
July$11,001 (9,090)909,090
August$19,000 (5,263)526,315
September$20,000 (5,000)500,000
October$145,137 (689)68,965
November$155,038 (645)64,516
December$176,056 (568)56,818

This example illustrates that a DCA strategy, in a volatile environment, where the price goes up long-term, can help reduce the inherent risk of volatility while lowering your average price paid per unit:

  • An initial $1,200 lump-sum purchase in January would have bought 1,463,414 sats (or 0.01463414 BTC) at an average cost of $82,034 per BTC or 1,219 sats per dollar.
  • Over 12 months of buying at $100/month ($1,200), the total number of sats acquired was 4,035,418 (or 0.04035418 BTC) at an average cost of $29,744 per BTC or 3,362 sats per dollar.

Of course, you want a higher number of sats per dollar—the more pieces of a bitcoin you can acquire for every dollar you spend, the better! In this case, the dollar-cost averaging plan would allow you to acquire almost three times as many sats.

Another reason dollar-cost averaging “works” is because it’s well-aligned with human nature. If complexity kills execution, a DCA strategy is the opposite. It’s easy to set up an automated DCA-based purchase plan and let it run without much ongoing thought. Once set in motion, such a strategy offers a simplified approach to long-term saving while requiring minimal effort to maintain.

Key benefits of a DCA strategy for bitcoin savers

Saving your purchasing power with bitcoin is hands-down easier than with other financial assets, but it’s not without adventure. Constant bombardment from shifting market trends, news cycles, hype, and other factors can add turmoil to the mind of a bitcoin saver. Such agitation can lead to fatigue and emotional decision-making, which risks kicking the best-conceived savings plan into a tailspin.

However, due to its structured nature, dollar-cost averaging offers a means of resisting the influence of these things. Consider the following obstacles faced by bitcoin savers that a dollar-cost averaging strategy helps them overcome.

Most people cannot successfully time the market

With bitcoin, as with many other markets, the idea of buying low and selling high is easy to understand but hard to execute. Even professional traders struggle to time the market consistently. Many people also confuse “buying low and selling high” with buying and selling at a market bottom or top. The reality is that the occurrence of a true market low or high is usually determined through hindsight.

With a DCA approach, there’s little need to worry about timing the market. Instead, purchases are made systematically and are self-limited by fixed-sized purchase amounts. Given a long enough time horizon and bitcoin’s continued adoption, when the market is up, you buy fewer satoshis, and when the market is down, you buy more satoshis.

As for selling high, well, no real worries there: “Friends don’t let friends sell bitcoin.”

Mitigating the psychological impact of volatility

The psychological landscape of saving and investing exists between the polar extremes of fear and greed. As with other asset classes, bitcoin volatility means upturns and downturns. During a downturn or bear market, fear can manifest itself in uncertainty and doubt about your own judgment and decision-making. Mix in doom-and-gloom from the media, a critical spouse, negative friends, cynical relatives, and skeptical acquaintances and it is easy to steer off course due to emotions based on fear.

Of equal concern is the impact of greed. During bull markets, when things are going well, it can seem as if they’ll go that way forever—which can lead to carelessness and throwing caution to the wind. But saving and investing, like life, advances in cycles. Sometimes the sun shines and sometimes the rain falls. Dollar-cost averaging tends to remain consistent; during the inevitable ups and downs, it provides a buffer to the constant voices of irrational exuberance and fear.

Treating bitcoin like savings

Systematically buying and holding bitcoin via a DCA strategy reintroduces the viability of setting aside savings as a prudent practice. An unintended consequence of the modern financial era is the near-disappearance of “savings” as a common pursuit. Few places now exist where you can reliably preserve surplus earnings from the work you do today that will be there for you and your loved ones in the future.

Without savings, life devolves into a constant sprint that is always competing for and making demands on your liquid cash. Should you look to find relief, investing platforms and exchanges are incentivized to promote the siren-call of high-time preference gambling and trading in the hope of achieving fast wealth through short-term gains.

Bitcoin, while still in its early stages, offers an opportunity out of the current paradigm. It is not a “company” nor a centralized project that depends on a small group of individuals to dictate its success. Rather, bitcoin is engineered hard money that is secured by consensus, a distributed ledger, and proof-of-work. As a consequence, when accumulated and preserved for the future, bitcoin is savings.

Challenges with dollar-cost averaging

Dollar-cost averaging is a great strategy for accumulating savings from personal income, but there are instances where you need to consider the trade-offs. Most notably, dollar-cost averaging is not a cure-all for uncertainty, as all forms of saving and investing involve at least some risk.

Missing large upside moves

In situations where you could make a lump-sum purchase, buying in increments via a dollar-cost averaging approach smooths the impact of volatility. However, while attempting to shield yourself from a large downside move, you may miss the opportunity to participate fully in a large upside move.

There are strategies to minimize this risk. Assume, for example, you have a $100,000 lump sum to deploy:

  • One strategy could be to divide the lump sum into four increments—which you then use to fund a series of large individual purchases.
  • Alternatively, the initial sum could be divided in half to make one sizeable initial purchase and then deploy the remaining funds at a lower rate each over ten months.

Both approaches move toward limiting the impact of short-term volatility while balancing speed of deployment. When facing the dilemma of allocating a lump sum, you need to decide on an approach you believe works best for you with the awareness that missing a significant upside move (or avoiding a significant downside loss) remains a possibility.

With bitcoin in particular, it is important to note that spreading out a purchase over too long a time frame may be counterproductive. Past performance is not a guarantee of future results, but bitcoin has appreciated very fast historically. It has demonstrated its ability to run away from you.

Five years, as an example, seems like it could have significant compromises if you have a large amount of funds to deploy today. As such, the precedent for its appreciation speed must be considered when defining the window for incremental bitcoin purchases.

It’s not a panacea

Regardless of the details of the size of purchases and how often, the prime mover for the success of any dollar-cost averaging strategy depends on the success of the underlying asset. You must determine—and ultimately, be proven correct—that what you’re buying will increase in value over time. For those saving in bitcoin, a dollar-cost averaging strategy only works if bitcoin works. Systematically acquiring an asset that ultimately goes down in price and stays down in price—or goes to zero—yields little or no benefits.

Elevate your bitcoin savings

Once you have a bitcoin DCA plan in place, you’ll want to learn more about how to take full advantage of your bitcoin savings through self-custody. Check out Concierge Onboarding if you’re ready to jump in—you’ll receive an onboarding call with a vault specialist, training on using our open-source recovery tools, access to Continuing Education webinars, and more.

No contents of this post may be relied upon as tax, legal, or financial advice, as they are solely educational in nature and have not been tailored to you or been reviewed by an attorney, financial advisor, or tax professional. For any questions related to your own specific situation, please consult with your own attorney, tax professional, and/or licensed financial advisor.

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