Dollar-Cost-Averaging: What it is, and how it can work 📈
Dollar-cost-averaging is a popular investment strategy for a reason: time and time again it proves to give a higher final value¹ to your money - without the market hassle.
Written by Amy Wilkinson
*This blog is not intended as financial advice. This is the personal view of the author only. Consider professional independent advice. There are risks in trading Bitcoin.
When it comes to our personal finances, many of us might have fallen into the trap of looking for a 'quick win' once or twice. Over the last decade or so, an increasingly popular (and relatively high-risk activity) that falls under this, is buying cryptocurrency based on market hype.
Bitcoin: Timing the market, or time in the market? 🤔
If you're reading this, you're probably familiar with the world of digital assets already, so you may have heard words (but never from Mode) along the lines of "now is the best time to buy" uttered once or twice before.
This narrative, regardless of the asset or currency mentioned, is pretty alarming. The fact is: there is no "best time to buy". As with any asset or currency, the value of Bitcoin and other cryptocurrencies can go either up or down. Some people have made serious money in recent years from trying to buy market ‘highs’, but others have lost just as much too.
When applied as a regular investment strategy, this type of thinking is better known as 'timing the market', but with bigger bets comes bigger risk, and the more you try to time the market, the more vulnerable your funds can become.
Let's take a look at how this could hypothetically play out:
💰 You have £1,000 that you would like to move into digital currency.
🗣 You tell a friend, who thinks they are being helpful by offering a suggestion that "now is the best time to buy Bitcoin" (which, unless your friend is a qualified and insured financial adviser, they’re likely just laying their FOMO on you and this is - unsurprisingly - pretty far from helpful).
👀 You then look at the price performance of Bitcoin, and you see that it dropped in value recently by 10% (bargain, right?).
🤑 You take your friend's advice and put your total budget of £1,000 on one Bitcoin purchase in one day.
😞 Three weeks later, you see the price of Bitcoin has dropped another 8%, meaning that for the time being, you've lost some of your capital, and any further price dips will have a direct negative impact on your total funds.
Now, an important thing to note here, is that whilst you can look at historical data to determine the chances of that asset or coin's value increasing (meaning you'd make more gains the more capital you invest), market fluctuation depends on a plethora of external contributors. In fact, even a tweet from Elon Musk can inflict price volatility, so you can never be sure your bet will turn out the way you hoped it would.
At Mode, we really back Bitcoin. We believe in the longevity of Bitcoin and are firm supporters of the idea that time spent holding your Bitcoin in the market is more valuable than trying to time the market. That being said, there are no insurances or regulations by which to measure or predict Bitcoin, so anything spent on Bitcoin could run the risk of losing value. It’s always worth doing your own research on any financial opportunities you’ve heard about, and considering what you’re willing to lose before making any purchases or sales. If you have any concerns, seek professional independent advice.
Dollar-Cost-Averaging: What is it? 💵
One strategy that has become increasingly popular within cryptocurrency trading due to its relative risk aversion is called ‘Dollar-Cost-Averaging’, or, ‘DCA’.
The simple structure of DCA has gained traction in both traditional stock purchasing and crypto purchasing alike, due to the idea that applying the strategy removes the stress of trying to time the market, and can reduce the impact of volatility on the overall purchase while still maintaining opportunities for financial growth.
With DCA, you divide up the total of your chosen spend on any given stock, asset, or currency periodically, irrespective of its value at the times you’ll be making purchases (naturally, if the value plummets you might want to reconsider your set up).
Here’s how it works 👇
Buyers take the amount they want to spend on crypto and break it up into smaller, recurring investments. For example: £1,000 spent over the course of a year, broken up into £20 spent weekly (for 50 weeks).
Over an extended period of time, the DCA investor doesn't have to 'time the market', meaning they don't have to worry about the value of their asset fluctuating. They simply sit back, relax and let their recurring payment do the work.
Studies² show that while this doesn't reduce the overall risk to capital when investing, it's a safer bet to enable longer-term growth. And one thing’s for certain - it reduces the hassle and stress associated with traditional lump sum investments!
Yep, we know - that’s a lot of words for a ‘simple’ strategy. Here’s how different a one-off purchase could look compared to a DCA strategy:
The popularised term, ‘Dollar-Cost-Averaging’ was first coined by investing pioneer Benjamin Graham back in 1949 and the strategy has stood the test of time for a good reason. While a one-off investment or crypto purchase might result in higher returns on your money, it’s not guaranteed, and DCA can offer a lower-risk option for your hard-earned funds while still producing a pretty penny in return.
At Mode, it’s in our DNA to ensure that we’re always bringing you the hard facts when discussing cryptocurrency trading, so that you can make an informed decision yourself.
We're not here to sell you flowers and unicorns, and it's important to understand that all investments and cryptocurrency purchases come with risk.
While Dollar-Cost-Averaging can be a really rewarding route to growing your Bitcoin, your capital is still at risk when applying the strategy in your own financial decisions. We’re here to support you through every step of your Bitcoin journey, but we always recommend doing your own research before making any money moves, and it’s important you understand we do not give investment advice. Opinions here are solely of the author.
*Not financial advice
*Fibermode t/a Mode is FCA registered as a Cryptoasset firm (FCA 928786). Bitcoin is not regulated in the UK. The value of Bitcoin can go up or down (or can drop to zero), and there can be a substantial risk you lose money.
Fibermode t/a Mode is FCA registered as a Cryptoasset firm (FCA 928786). Bitcoin is not regulated in the UK. The value of Bitcoin can go up or down (or can drop to zero), and there can be a substantial risk you lose money. No FSCS/FOS protection. Capital gains may be subject to CGT. 18+ UK residents only. KYC required. We do not offer financial advice. More on risk associated with Bitcoin trading 👉 https://www.modeapp.com/protection.
This website and its contents do not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or solicitation or any offer to buy or subscribe for or otherwise acquire, securities or tokens in any jurisdiction, or an inducement to enter into investment activity.
Fibermode Limited does not provide advice to clients. Please seek your own legal, tax or investment advice as you deem appropriate.
Fibermode is a Registered Cryptoasset firm and is registered with the UK Financial Conduct Authority, pursuant to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended.
Mode Global Holdings PLC (“Mode”): company number 12794676. Mode’s subsidiaries: Mode Global Limited, JGOO Limited and Fibermode Limited, the Mode group. Registered office of Mode its subsidiaries: Finsgate, 5-7 Cranwood Street, London, EC1V 9EE, United Kingdom.