Bitcoin Dollar Cost Averaging

Taking the guesswork out of investing in bitcoin

Updated Nov 29, 2024

Disclaimer: Lightning Pay does not offer any investment, financial, tax or legal advice. We're just trying to help you learn a thing or two about bitcoin, so don't rely on us for investment advice in what you read here. We encourage you to consult an appropriate professional advisor to understand your personal tax or financial choices.

Investing in Bitcoin can feel like navigating uncharted waters. Its price swings are notoriously unpredictable and extreme, attempting to "time the market" often results in missed opportunities, feelings of FOMO, and mistakes. Instead of trying to predict bitcoin's next big move, many investors adopt a proven strategy: Dollar Cost Averaging (DCA). In this article, we'll explore why timing the market is so challenging in bitcoin, how DCA works, and why many bitcoin investors choose to adopt this strategy.

Why Is Timing the Bitcoin Market So Difficult?

Bitcoin's price is famously volatile. Sharp ups and downs often occur within short timeframes, leaving even the most seasoned investors guessing. Consider this:

  • Studies have shown that the top 10% of days in any given year account for a significant percentage of Bitcoin’s annual gains.
  • Missing just a handful of these days could drastically reduce your returns, while being present during those spikes could amplify your portfolio’s growth.

The key takeaway? Predicting which days will see the largest price increases is nearly impossible. Many investors who try to wait, and buy the dip, find themselves on the wrong side when these days occur. Instead of riding the emotional roller coaster of trying to get the timing right, many seasoned bitcoiners just take this factor out entirely through dollar cost averaging.

 

What Is Dollar Cost Averaging (DCA)?

Dollar Cost Averaging is an investment strategy that involves consistently purchasing a fixed dollar amount of an asset—like Bitcoin—at regular intervals, regardless of its current price.

Here’s how it works:

  1. Set a schedule: Decide how often you want to invest (e.g., daily, weekly, or monthly).
  2. Choose an amount: Commit to investing a fixed sum each time.
  3. Automate it: Many platforms allow you to set up recurring purchases, making it easy to stick to your plan.

For example, if you invest $50 in Bitcoin every week, you'll buy more Bitcoin when the price is low and less when the price is high. Over time, this strategy helps reduce the impact of short-term volatility and averages out your cost basis.

Through our Auto-Buy feature at Lightning Pay, we can help you set up a simple dollar cost averaging scheme, automatically sending bitcoin to your Lightning Wallet, taking the emotion out of deciding when is the right time to buy. You can sign up to set your strategy.

Benefits and Risks

The Upside

  • Reduces emotional decision-making: By committing to a schedule, you eliminate the stress and guesswork of deciding when to buy. You can even automate your Dollar-Cost averaging entirely.
  • Captures long-term trends: Bitcoin’s price has historically trended upward over the long term. DCA allows you to participate in that growth without worrying about day-to-day fluctuations.
  • Accessible to all budgets: You don’t need a large lump sum to get started—DCA makes Bitcoin investment accessible to anyone, even with modest amounts.

The Downside

  • Potentially reduced returns: Obviously, buying at low prices and selling at high prices is an optimal strategy, if you're confident you can beat the market. Some of us can, but most of us can't. The risk is lower returns in the long run as a tradeoff of taking out the guesswork.
  • Cost of Capital (Opportunity Cost): To effectively DCA implies you have extra cash sitting round waiting to be used to buy your asset. This has real costs and may not be an optimal strategy for you.
  • UTXO Management: If you're using dollar cost averaging directly to a traditional on-chain wallet, you may be incurring fees, now and in the future that are not optimal for saving. Dollar cost averaging to a Lightning Wallet is Recommended.

See for Yourself

There are a lot of calculators out there that will let you back-test a Dollar-Cost-Averaging Strategy. We like the one from Bitbo, and while it might be a little intimidating, its pretty easy to use and see how you would have performed over various time periods with a DCA strategy.

Final Thoughts

If you're new to Bitcoin or investing, begin with an amount you’re comfortable with. As you gain confidence, you can adjust your contributions.

Dollar Cost Averaging offers a practical and straightforward approach to investing in Bitcoin, allowing you to build your position gradually while mitigating the risks of market volatility. Whether you're a seasoned investor or just getting started, DCA provides a disciplined way to participate in Bitcoin’s growth without the stress of market timing.

Ready to take the next step? Sign Up at Lightning Pay and start your Bitcoin DCA journey today! As always, feel free to contact us at support@lightningpay.nz with any questions you might have.