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The Motley Fool: Optimize Profits and Reduce Risks with Bitcoin and Dollar-Cost Averaging

The common strategy of dollar-cost averaging (DCA) is a time-tested and simple way for investors to take the emotion out of investing and maximize exposure to an asset. By consistently making investments on a recurring basis, a DCA strategy helps portfolios weather periods of volatility and at times, even produce returns in the worst of bear markets. 

Although DCA has been around for a while, it turns out this strategy can be employed with one of the newer assets in the financial world, Bitcoin (BTC -0.79%).

Coins piled in a jar.

Image source: Getty Images.

What the numbers say

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To highlight the real power of DCA, let's run through a basic scenario. Let's assume our hypothetical investor purchases $100 of Bitcoin every week, regardless of Bitcoin's price. To show the advantages of a DCA strategy, we will evaluate performance over three different lengths of time.

To begin, let's take a look at our investor's portfolio after one year. With $100 invested every week since October 2022, the total amount invested would be $5,200. Based on Bitcoin's performance during this span, that $5,200 would be worth $5,893 today, a modest 13% return and enough to grab nearly one-quarter of a Bitcoin. 

Considering Bitcoin remains well off from its all-time high of nearly $69,000 and continues to try to escape a brutal crypto winter, this performance seems adequate. Add in the fact that a similar strategy applied to the S&P 500 would have returned a measly 4.5% in the same time frame, and a Bitcoin DCA strategy becomes more attractive. 

Now let's go back further. Say our investor remained consistent in their investments and weathered market fluctuations and Bitcoin's notable volatility for five years. How would the DCA strategy perform?

With a total of $26,100 invested, the portfolio would have grown by 112% to $55,431 and collected 2.11 Bitcoins. Over the same time frame, the S&P 500 would have returned a reasonable 20% and be worth just over $31,000.

We are beginning to see the benefits that a DCA strategy holds and the two clear advantages it provides. First, it eliminates the emotion that so often overtakes investors when volatility hits markets. Second, it enables one of the most valuable assets to work in your favor -- time. 

So, with all that said, how would an investor fare if they employed the same weekly $100 allocation over the course of 10 years? As you can imagine, the results improve significantly. 

With consistent weekly $100 investments, the total value invested since October 2013 would be $52,100. Thanks to the added benefit of time and Bitcoin's monumental journey of price appreciation since then, our hypothetical investor would now be a millionaire with a portfolio worth more than $1.3 million and nearly 50 Bitcoins, representing a total return of 2,407%. 

Necessary context

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While past performance is undoubtedly no guarantee of future returns, especially when it comes to crypto, there is an abundance of historical data proving that investors with the most discipline and consistency over extended periods of time typically reap the greatest rewards. 

As Bitcoin continues to try to shake off the recent bear market, investors today have an opportunity to begin their DCA journey and gain exposure while its price trades at a relative discount. However, it should be noted that the likelihood that Bitcoin will produce returns like it did in its earliest years are slim. But that doesn't mean it doesn't have plenty of room to grow in the coming years and decades.

With Wall Street juggernauts such as BlackRock, Fidelity, and Invesco vying for Bitcoin ETF approvals with the U.S. Securities and Exchange Commission, deep-pocketed institutions are knocking on Bitcoin's door. Add in growing trends of an increasingly digital economy plus continued inflation of fiat currencies, and Bitcoin's price will likely benefit over the long term as demand for its limited 21 million coins grows. 

RJ Fulton has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.


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