Crypto glossary
Lump sum vs DCA
Lump sum investing puts all available money into an asset at once, as opposed to dollar-cost averaging, which spreads purchases over time.
With a lump sum, an investor who has, say, 12,000 dollars to invest buys immediately. With dollar-cost averaging (DCA), the same amount is split into regular purchases, such as 1,000 dollars a month for a year. Both end up fully invested; the difference is timing and the average price paid.
Studies of stock markets, including well-known analyses by fund managers, have found that lump sum investing beats DCA in most historical periods, simply because markets rise more often than they fall and money invested earlier has more time to grow. DCA wins when prices fall during the buying period. In crypto, where drawdowns of 50% or more are common, the gap between the two approaches can be very large in either direction.
The choice is as much about behaviour as maths. DCA reduces the regret of buying just before a crash and helps investors stick to a plan, which matters in a volatile market. Lump sum maximises expected time in the market but demands tolerance for seeing a large position fall soon after buying.
Example
An investor receives a 10,000-dollar bonus. Instead of buying bitcoin all at once, he splits it into ten monthly purchases. Prices fall for six months, so his average cost ends below the first month's price.