Crypto Dollar Cost Averaging Explained

Dollar Cost Averaging (DCA) is a time-honoured investment strategy that involves purchasing set amounts of an asset at regular intervals, regardless of price. This allows you to reduce your average purchase price of the asset and take some of the emotion out of investment decisions. But how does DCA apply to crypto assets? Keep reading to find out more.

Key Takeaways:

• Dollar Cost Averaging (DCA) involves investing a fixed sum of money in regular intervals to buy an asset, regardless of price.
• DCA is a proven and popular accumulation investing strategy in both traditional financial and crypto markets.
• Investors can easily automate DCA using the Coinstash App.

What is Dollar Cost Averaging (DCA)?

Dollar Cost Averaging (DCA) is a simple, beginner-friendly investment strategy whereby an investor makes incremental, regularly scheduled investments in a particular asset over a period of time, instead of investing the entire sum at once. 

This strategy has been used in traditional finance (TradFi) for decades, but it can also be applied to investing in cryptocurrency. Although cryptocurrency can be considerably more volatile than stocks, DCA can help you reap many of the same rewards traditional equities traders enjoy through the strategy.

The main idea behind this method is that by spreading out the purchase of an asset over time, the impact of short-term volatility can be minimised. Instead of making a lump-sum purchase, investors divide their funds into smaller amounts that are distributed at regular intervals (e.g. weekly, fortnightly, monthly).   

By buying more units when the asset price is low and fewer units when the price is high, investors can average out their cost-basis over time and potentially increase the probability of making profit on their investment. 

How does Dollar Cost Averaging work in Crypto?

Let’s say you have $50,000 you’d like to invest in Bitcoin. 

If the price of Bitcoin was currently $50,000 and you chose to do a lump-sum investment right now, you’d have one Bitcoin at a cost-basis of $50,000.

However, if you instead decided to DCA and spread your $50,000 across five equal monthly buys at a price of $50,000/BTC, $45,000/BTC, $25,000/BTC, $25,000/BTC and $55,000/BTC, then your average cost basis would be $40,000, and you’d own 1.4 Bitcoin.

And therein, lies the beauty of DCA. Despite the significant fluctuations in Bitcoin price, with DCA you invest the same amount of money, but can potentially accumulate more Bitcoin at a lower cost basis. 

Why Dollar Cost Average?

Many investors are drawn to DCA because of its simplicity.

DCA makes investing in crypto more straightforward because of its fixed, automated investment schedule. This makes it a perfect go-to strategy for both beginner and seasoned investors with long-term investment horizons. 

Mitigate Market Mistiming 

“Buy low, sell high” - If only it could be so easy.

Theoretically, “buying the dip” sounds simple, but this trading and investing approach is notoriously difficult to pull off, even for seasoned investors. Acclaimed entrepreneur and hedge fund manager, Peter Theil, famously stated that “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

When investing in cryptocurrency, it can be tempting to try and time the market by buying at the lowest price. However, predicting market and price movements is a challenging and risky task. 

Spreading out investment purchases evenly over time instead of making a lump-sum buy may help investors avoid the pressure of timing the market and mitigate the risk of buying at the wrong time and suffering potential large losses.

Remove Emotion from Investing 

The crypto market is an exciting and sometimes scary place - prices can be volatile, and newsworthy events occur almost daily. It can be easy for beginner investors to get caught up in the hype, which could lead to emotional decision-making and poor investment choices. 

DCA has the added benefit of removing several emotional aspects of trading/investing so that investors can avoid the psychological impact of volatility and overcome the fear of missing out on price action, also known as FOMO. By making routine investments regardless of market activity, investors remove the urge to react to changes in the market and eliminate the weight our emotions have on decision making. 

Reduce Investment Risk 

DCA reduces the percentage of a portfolio that is invested at any given time. This can help to mitigate the impact of price drops on an overall investment portfolio and allow for a more consistent means of growth, in the long-term. 

How to Dollar Cost Average 

To implement a DCA strategy, all an investor needs to do is create a plan to purchase a fixed amount of a particular asset, at predefined intervals. 

They can then set up a recurring purchase on a platform like Coinstash. Built for investors by investors, Coinstash offers a DCA Automatic Purchase feature that allows users to regularly invest in their favourite cryptocurrencies and accumulate their holdings without having to constantly follow the market. 

The Automatic Purchase feature gives users the ability to apply the DCA strategy by scheduling recurring purchases for over 230+ cryptocurrencies on a daily, weekly, biweekly, or monthly basis. 

Considerations

While DCA can be a highly effective strategy, it’s important to note that it may not always be the optimal strategy in certain contexts. For example, if asset prices are trending up, and continue to go up significantly in the short-term, investors using DCA may end up buying fewer shares over time. Conversely, if the prices of assets are falling with no signs of recovery, investors may be forced to exit at a loss if they don’t halt their scheduled investments.

DCA is not a guarantee of profit and does not protect against loss. This strategy works assuming you pick the correct assets that survive and thrive in the long-term. If the asset price falls to zero, it doesn’t matter when you enter the market. Your investment is a net loss.

DCA requires discipline and a long-term investment horizon. It is not suitable for traders/investors who are looking to make quick profits or need to access their capital in the short-term.

The crypto market is highly volatile and prices can fluctuate rapidly. DCA can help to reduce the impact of volatility on the overall investment, but it doesn't eliminate the risk entirely. Investors should always do their own research and invest only what they can afford to lose.

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