Over the years, different investment models have emerged for digital assets such as Bitcoin in order to maximize returns. Most of the time, investors try to “buy the bottom and sell the top”. However, Bitcoin’s performance has proven that there is no way to accurately predict the bottom of a bull market and catch the top. With this in mind, another model of investing in Bitcoin has emerged as the best way to invest in this asset for maximum returns.
Advantages of Cost Averaging (DCA)
In a tweet shared by an anonymous X (formerly known as Twitter) account, the benefits of adopting a dollar cost averaging (DCA) approach to investing in Bitcoin are demonstrated. This post includes a graph showing the performance of investors using DCA versus investors who buy all of the holdings outright at a certain price.
For Bitcoin, which is highly volatile, DCA has proven to be the best path over time, especially when the digital asset’s price falls. This approach works even if investors are buying digital assets at all-time high prices.
As the post notes, some investors who started buying BTC in November 2021 are now profiting, when the cryptocurrency was trading at its highest level to date. This is because they continue to buy at lower and lower prices as the price of BTC drops.
Continued implementation of the DCA strategy brought their weighted average cost of 1 BTC to $26,386. Given that BTC is currently trading above $26,400 as of this writing, these investors, despite initially buying into the top, are now back in profit.
BTC juggling above $26,400 | Source: BTCUSD on Tradingview.com
Earn Bitcoin with DCA
One example of using the DCA strategy to shine is MicroStrategy, a publicly traded company with the world’s largest Bitcoin holdings. The company initially started buying BTC at the start of the 2020 bull market, buying 21,454 BTC in one go. The firm continued to buy bitcoin throughout the bull market, increasing its average cost.
When the market crashes in 2022, MicroStrategy’s BTC holdings will be in the red. However, MicroStrategy’s ongoing dollar-cost averaging during the bear market has helped lower its average cost basis, bringing it closer to breakeven at the time of writing.
Given that Bitcoin has a tendency to rise and fall rapidly even during bull markets, the DCA strategy will work best for investors. Not only does it help reduce cost averaging, but it also helps reduce the risk an investor takes at a certain point in time by investing in small amounts at once rather than all at once.