One question that many people ask in terms of cryptocurrency is “When is the right time to invest”. It’s impossible to answer that question since the crypto market is volatile and actively looking for what to invest your money in is stressful and time-consuming. After all, how would you know when to buy if the price of crypto is so unstable. You may end up buying too early, or too late, or because of this fear of variation, you may end up not buying one at all.
To avoid spending too much time trying to time the market when buying crypto, investors use this strategy called Dollar-cost averaging or DCA to start small and build a long-term value without getting hit by market volatility. In this post, we’ll explain what DCA is all about, how it works, why and how you should apply it when investing in crypto.
What is DCA?
Dollar-Cost Averaging (DCA) or Cost Average Investing is an investment strategy where the investor splits the total amount they want to invest on an asset over a long period instead of spending it all at once. It’s essentially the practice of purchasing small amounts of an asset on a regular basis regardless of the current market value of the said asset at the time of future investments.
This strategy is designed to keep the volatility of an asset’s values at bay, thus bringing down the risks involved for when you invest your entire available funds on the same asset in one go. Since any form of trading (stocks, gold, or crypto) is subject to market fluctuation and looking for the perfect time to make investments towards an asset can be time-consuming, DCA can be a good approach for those individuals who are unable to read the market.
Upon splitting the investments into smaller amounts, you can prevent the market’s volatility from affecting your investment and can thus mitigate risks that you may otherwise incur when making a bet at the wrong time. Since even the experts fail to read the right market, DCA can help smoothen your entry into the market by balancing out any negative impact that some of your purchases may have induced.
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How does Dollar-Cost Averaging or DCA work?
In many ways, DCA is a strategy that’s aimed at individuals who want to invest in an asset for long-term benefits and aren’t looking to sell them immediately. Although conservative in nature, DCA can help you evaluate your investment for every period since the purchase value of the investment is going to be the same throughout the period you’re investing for.
Since the money you invested is constant throughout different transactions, you will have more crypto when its price is low and lesser crypto when its value is higher. While Dollar-cost averaging restricts you from making high gains on a crypto asset that’s soaring high at most times, it saves from times when you purchase at the wrong time, at which point you may have just turned it into a loss.
We’ll explain this in two examples below.
Let’s say, you had $600 with you to invest in Ethereum at the start of January 2021 and you don’t plan on selling what you invested; and thus still have the crypto with you. If at the time, you had your share of doubts about Ethereum, you could’ve used DCA to split your $600 over the course of 6 months, with monthly investments of $100 from January 2021 to June 2021.
Since we’re sticking to the real-world calculation here, the $600 over a 6-month period would have earned you a total of 0.40132861 ETH on DCA. If you had invested the same $600 as a lump sum amount on January 1, 2021, you may have earned 0.82099559 ETH on lump sum, which is essentially twice that of what you earned with DCA.
If in either case, you stuck with your initial investment and held it until now, the purchased crypto will amount to approximately $950 and $1950 with DCA and lump sum investment respectively.
In this example, you would have benefitted more if you had opted for a lump sum investment over DCA for the specified period.
As is evident from the numbers, opting with DCA does cost you a higher potential gain but that will only happen when the market for ETH during the buying time was lower than what it is right now.
If you had instead, invested the same $600 in lump sum on September 1, 2021, and in DCA from September 2021 to February 2022, you would have earned 0.15876250 ETH and 0.16714598 ETH respectively. In terms of actual currency, these amounts of Ethereum would be worth approximately $370 on lump sum and $390 on DCA.
In this case, opting for DCA earned you more ETH and thus, more profits for the specified period. Since the Ethereum market was down during this period, you only lost close to $210 with DCA compared to $230 that you lost with a lump sum.
This is proof that DCA helps you smooth out your losses for when the market is down instead of bigger losses that you may otherwise incur for when you would have invested the entire value at the wrong time.
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Why should you use Dollar-Cost Averaging?
Bitcoin and Ethereum have been out there for a while now but if you’re only starting now, you may want to look elsewhere as neither of them is anywhere close to being affordable for first-time investors. That’s where DCA comes in as it helps newcomers invest in crypto without prior expertise or spending a huge chunk of money.
If you’re looking for reasons to rely on DCA for investing in crypto, then here are a few worth noting.
- You don’t run into risks of a bad-timed investment, because you’re only investing part of the total amount at the (wrong) time.
- You can easily smoothen out a bad investment the next time you purchase crypto for the same price or during future transactions.
- You can stay invested without any kind of stress, deep research, or consuming too much time.
- You don’t have to worry about when to purchase crypto as DCA will calculate how often you need to invest at what value.
- Short-term market volatility won’t affect your crypto portfolio as the invested amount will be significantly lower.
- If you don’t have the time and resources to know when to invest in crypto, using DCA as a strategy should benefit you in the long term.
- By not making a lump sum investment on a negative asset beforehand, you can avoid investing more on what crypto asset you invested with DCA and save your money for investing elsewhere.
- DCA can be employed alongside a buy-and-hold strategy where investors of crypto don’t plan to sell it at any cost if the value of the crypto continues to soar.
Why should you NOT use Dollar-Cost Averaging?
As lucrative as it may seem for new investors, Dollar-Cost Averaging isn’t the only strategy when it comes to buying or selling cryptocurrencies. Since the risks involved in this strategy is low, the reward is also on the lower spectrum but in turn, you stay protected from market fluctuations. Regardless of that, here are some drawbacks that you should know before employing DCA on crypto:
- Your gains will be lower than what you may earn through a lump sum investment that you made when the market was down.
- You may end up buying crypto through DCA over high prices and see the market go down later.
- You’re charged a transaction fee every time you invest in crypto, thus increasing your expenditure throughout the investment.
- For assets that show an upward trend at all times, DCA will only result in losing out on big gains as the price of the asset is only going up every time you invest. Since you’re paying the same amount over a long period, you’re gradually buying lower proportions of the crypto on each investment which will definitely cost you more gains than lump-sum investments.
How to use Dollar-Cost Averaging on cryptocurrency
If you’re considering using Dollar-Cost Averaging when investing in cryptocurrency, you should know how to apply it but before you do, you should determine how much you’re going to invest in crypto. This is the same amount you may have spent investing on crypto in one go, but instead, you’re splitting it into multiple transactions to hedge potential losses and avoid a negative impact on your portfolio.
The next step is to decide which crypto you may want to invest in. DCA can be beneficial to you when you’re trying to invest your money in crypto that’s fluctuating but is generally known to give you a good outcome over a longer period. There’s no point using DCA on a crypto platform that continues to ascend over time.
The strategy would materialize on those platforms that are hard to read. If you use one of the available open-source calculators like DCA-CC, you can determine which crypto will suit your investment. According to these calculators, cryptos that have a chance at benefitting from Dollar-Cost Averaging are BNB, XRP, Solana, Terra, Avalanche, Cronos, and Polygon.
Note: We do not endorse any of the crypto mentioned here; investment towards any of them doesn’t guarantee profits and should be made at your own risk.
Once you’ve made up your mind on which crypto to invest in, the next step is to look for exchanges you can buy from. When choosing an exchange, you should be on the lookout for those that offer recurring investments or auto-invest options. Some exchanges that provide you with these features are Binance, CoinSwitch, Robinhood, CoinBase, Gemini, etc. A recurring investment makes sure you’re reminded when to purchase your next batch of crypto so that DCA is applied accordingly.
After you find the right exchange that suits your needs, create an account on the platform and navigate to their Recurring investments/orders section. From there, select the crypto you want to invest in and then choose a timeframe for your investment, and the amount you want to invest. You can then follow their instructions to set up your first investment, find ways to manage your future purchases and you’re good to go.
When should you prefer DCA over lump-sums?
Now that you know how DCA is beneficial and how you can apply it when investing in crypto, there must be a big looming question in your head – when exactly can you use DCA to your advantage? To answer the question, we’ll list the situations that may benefit from relying on DCA over lump-sums.
- If you think the price of crypto is down now but will lift upwards in the long run, then you can use Dollar-Cost Averaging to make small investments regularly.
- If a crypto’s future is unknown and you’re still interested to invest in it before it’s too late, DCA can help smoothen any drastic changes in your portfolio by mitigating transactions made at bad times and balancing them out with more beneficial investments of the same asset when the value wasn’t impacted.
- If crypto has been unstable and you don’t want to invest heavily in it, DCA could even out your gains and losses without much impact.
- If you have a prior history of panic buying/selling in the fear of missing out, DCA should help you stay strategically invested in crypto instead of leaving decisions to be made with your emotions.
If you paid attention to the above info, you should now know that Dollar-Cost Averaging is a conservative approach to get into cryptocurrency. The strategy will provide you with cover when the market is falling and will earn you some profit, if not in full potential. In times when a crypto’s value is going down, you can benefit from a low average purchase price compared to what you may have paid for in a single transaction when the value was soaring.
DCA can be beneficial to those who have little time or interest to track the crypto market but want to invest in it anyway. Since the strategy is simple at its core, investors can avoid the urge of buying low and selling high at the right time. Instead, they can rely on the strategy to not lose them big and give you some profit.
That said, you should know that using DCA doesn’t free you of any investment risks. Because cryptocurrency is still in its infancy, any platform can crash or cease to exist in the future. You should, thus, research beforehand and never put more money than what you can afford before investing.
This article in no way encourages you to fully rely on Dollar-Cost Averaging (DCA) when investing in crypto or any other asset. Cryptocurrency is still a delicate technology and transactions and estimates made across all platforms are complex and speculative at best. The information we’ve shared in this post doesn’t completely vindicate risks that you may incur when dealing with crypto and shouldn’t serve as an endorsement towards DCA or cryptocurrency. We suggest consulting a qualified advisor to help you strategize your crypto investments before you make any decision.
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