Is dollar cost averaging the way to invest in Bitcoin?

Dollar cost averaging can smooth out your investment returns without needing to time the market.

| More on:
wooden block letters spelling DCA

Image Source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Bitcoin (CRYPTO: BTC) is down 1.7% over the past 24 hours, currently trading for US $43,564 (AU$59,872).

If crypto investors believe this represents a low point, should they invest a large sum of money into Bitcoin today?

Or is it better to ignore the price swings and invest a fixed amount into the token on a consistent basis?

The latter strategy is called dollar cost averaging.

Traditionally it's been used by share investors looking to smooth out their returns without trying to time the market. But is it suitable for cryptos?

Is dollar cost averaging the way to invest in Bitcoin?

It was only on 10 November that Bitcoin hit all-time highs of US$68,790. A good time to sell, perhaps. But certainly not the time to go all-in.

On the flip side, over the past 12 months Bitcoin dripped as low as US$28,894 on 20 July.

With perfect hindsight, that would have been a great time to buy.

But in the crypto world, as in share markets, we're not gifted with hindsight months in advance.

Which brings us back to dollar cost averaging

Adam Traidman, is the CEO and crypto company BRD. And, as CNBC reported, Traidman uses dollar cost averaging for his own Bitcoin investments. He invests a fixed amount into the token at set times, ignoring the daily price swings.

According to Traidman:

Casual investors have a tendency to buy into the hype cycle and sell when the losses become a reality. It's crazy, illogical thinking, but it happens all the time. Why would people buy high and sell low? Well, they don't want to, but they sell out of fear.

As for when the Bitcoin price does take a tumble?

"I'm not letting [the price drop of Bitcoin] bother me, because I'm confident that the price performance charts have shown that it's going to return in the long term," Traidman said.

He added that, "Dollar cost averaging ends up making sense in the long term. If you contribute a little bit every time, in the long term you end up with a pretty darn good return if you can weather all the ups and downs."

Gemini on dollar cost averaging for cryptos

Global crypto trading platform Gemini also sounds off on the potential benefits of dollar cost averaging.

The company notes that, "Cryptocurrencies can be quite volatile, oftentimes even more so than stocks."

On its website Gemini notes that while investors may miss out on some potentially big gains, dollar cost averaging is likely to lower the risks:

You can generate a potentially greater profit from buying during dips and selling at the top. However, there's broad consensus that DCA [dollar cost averaging] is a safer overall method of investing than lump sum buying and selling. It's lower risk and lower reward, but still offers the chance of benefiting from market swings.

And when we're talking about an asset like Bitcoin, there are plenty of market swings to potentially benefit from.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Bitcoin.  The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on How to invest

A couple sits in their lounge room with a large piggy bank on the coffee table. They smile while the male partner feeds some money into the slot while the female partner looks on with an iPad style device in her hands as though they are budgeting.
How to invest

Where to invest $8,000 in April 2024

Here's what sort of returns could be on offer from these ASX shares according to analysts.

Read more »

An ASX dividend investor lies back in a deck chair with his hands behind his head on a quiet and beautiful beach with blue sky and water in the background.
How to invest

Shares vs. property: How to generate $500 passive income per month

We run the numbers.

Read more »

A woman holds a lightbulb in one hand and a wad of cash in the other
How to invest

ASX 200 shares vs term deposits: What $5,000 invested a year ago is worth now

Which has been the superior option for investors?

Read more »

Kid on a skateboard with cardboard wings soars along the road.
How to invest

Shares vs. property: Why cheaper homes and ASX small-cap shares are rising fastest in 2024

We look into the changing trends in shares vs. property.

Read more »

Smiling young parents with their daughter dream of success.
How to invest

2 ASX shares that could help set you up for life

Analysts are saying good things about these buy-rated shares.

Read more »

a man wearing casual clothes fans a selection of Australian banknotes over his chin with an excited, widemouthed expression on his face.
How to invest

$20,000 invested in these ASX 200 shares 10 years ago is worth how much?

Would you be laughing all the way to the bank today or not?

Read more »

Busy freeway and tollway at dusk
How to invest

If inflation rebounds I'll be buying this leading ASX 200 share

Inflation doesn’t impact all ASX 200 shares equally.

Read more »

Businessman working and using Digital Tablet new business project finance investment at coffee cafe.
How to invest

Forget term deposits and listen to Warren Buffett's advice with ASX shares

Are you missing out if you buy term deposits?

Read more »