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Dollar-Cost Averaging for Crypto (DCA Crypto)

Igor Grigorchenko

News editor

Sep 15, 2022 at 05:47

There are a number of strategies for investing all with their notions of how they guarantee success. But realistically, nobody knows when the next big hit will come. Not even the guys at Wall Street. And if you’re like me who has no background in business but sees potential in this crypto wave and would love to be a part of it, then Dollar cost Averaging is the best way to start. 

A typical average investor loves to strike while the iron’s hot. They like to go big and win big because the perception of investing in cryptocurrency on mainstream social media tells us that if we don’t invest large chunks in the stablecoins or whatever altcoins, we’ll never enjoy the best life. 

Well, that’s horseshit. Pardon my French. Investing large chunks of money into something as volatile as crypto is a quick way to regretsville. 

Let’s say you wish to invest in Bitcoin or Ethereum. I know what you’re thinking – unless you’re a millionaire with lots of extra cash laying around, the two top stablecoins might be a little out of reach. But you’re wrong. Their prices might be at an all-time high right now but that doesn’t mean you can’t still make a killing by investing in them. 

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Wanna know how you do it? The same reason you’re reading this post: Dollar Cost Averaging

Let’s take a look at what exactly DCA is, how it works for crypto, and a few pros and cons to help ease you through your investment journey. 

What is Dollar Cost Averaging?

Dollar-cost Averaging is the mathematically risk-averse way you can invest in stocks, coins, or projects you believe in the long term. 

DCA is the practical process of averaging out your investments by putting in regular amounts at specific intervals. As opposed to putting a large sum into a project at the “right time” with the hopes of making a fortune. 

The time period for your investments can be days, weeks, and even months, depending on the investor and the size of the investment. 

Why use Dollar-cost Averaging for Crypto?

Investing and trading in the crypto space can get stressful because of its intense daily price movement. What’s more, keeping up with price movements and trying to track it all the time is quite demanding.

So why is DCA the most reliable choice for crypto? 

Crypto is characteristically volatile and almost impossible to predict. But, using DCA as an investment strategy within the crypto space has proven to be the most reliable way to gain consistency and minimal loss. 

Several questions arise in the minds of investors when they decide to venture into the crypto space. Is it too late to buy this coin? Is the market going to be favorable if i invest so much or this little? What’s the best time to buy into a particular project? The realistic answer is that nobody has a clue when the market will go up or what the best time to invest is. 

It is critical as a new investor to find the strategy that works best for you in any space. Choosing a strategy that you can be consistent with is what will actually eventually get you closer to you investment goals.

Another major problem investors face – novice or seasoned – is accurately timing the market. Even if the direction fo the trade is correct, if your entry timing is off, it affects the entire trade. In addition to the time factor, DCA also  mitigates risk and grants you an unbiased entry into the market. Once you’ve successfully crafted pattern for yourself, the logical step would be creating an exit plan. 

Now that you’ve minimized risk and you’ve Dollar-cost averaged into a position that you’re comfortable with, now you need to determine your individual trading strategy. 

Some incestors choose to “buy and hold” long term with the aim of accumulating more as the market appreciates. While others choose to have a target price range that they intend to hit and pull out. 

Doing this is quite simple. 

You simply have to reverse your DCA strategy. As you get closer to your target, start to split your investments into chunks and sell them off in the market. It’s that easy.  

How Dollar-Cost Averaging Works for Crypto Investing

As you might be well aware, cryptocurrency is extremely volatile. With high highs and low lows causing massive loss in investments or incredible gains. The risk notwithstanding, Crypto is by far one of the potentially life changing investments currently. 

Piggybacking off our earlier statement on stablecoin investment. Imagine deep diving into Bitcoin or Ethereum trading graphs and you realize that if you had invested $10,000 into the coin a year ago, you would’ve made 10x that. Sucks doesn’t it. 

That’s not all, now that it’s at an all time high, you have the “bright idea” to wait for the next low. That my friend is a recipe for failure. 

Then, a few months later, you visit the project and it’s at an all time low. Then you begin to wonder if the project is even going anywhere and maybe it would be a mistake to invest in a project that is this flaky. Decision fatigue kicks in and you don’t purchase any other coin at all.

Don’t get caught up on how rich you could’ve been. Only look at how you can make the best possible investments with your limited resources with mitigated risk.

Coinbase provides a weekly automated DCA investment strategy that helps you structure your investments and takes a away the hassle of manual deposits. 

Benefits and Drawbacks of Dollar-Cost Averaging in Crypto

In investing, nothing is a sure thing. Even if your strategy seems full-proof, there will always be drawbacks. Take a look at some of the benefits and drawbacks of DCA. 

Benefits of DCA

 

  • Mitigates Risk

DCA reduced the high risk of investing lump sums into something volatile as crypto. Here your money is preserved, liquidity provided and flexibility is guaranteed to manage your investment portfolio. 

In addition to mitigating risk, it also provides you with the opportunity for high returns and protects you from short-term downside by preventing feelings of investment regret. 

A market in decline or in this case, a bear market is mostly seen as a buying opportunity and through DCA, investors get to reap long term returns when the market begins to rise. 

  • Prevents Bad Market Timing 

Market timing is one of the hardest things to predict when it comes to trading or investing. It is difficult to anticipate market swings and even professionals find it tricky.

But seeing  as we are neither professionals nor prophets, using DCA helps you skip that process. It ensures your portfolio avoids big hits as opposed to single large investments that could result in huge loss.

  • Manage Emotional Investing

Emotional investing is a phenomenon that is caused majorly by making huge investments into “high potential” projects. As earlier stated, DCA is completely anti-lump sum investing and this in turn will mitigate expectations. 

Investors who Dollar-cost average are not fazed by market news and media hype. They focus entirely on ensuring that they make the best decisions for their long term goals like the projects, the capital and the target. 

Ride out market downturn by investing periodic smaller amounts in a bear market assists in riding out market downturns and keeps a healthy balance for upside long term. 

Drawbacks of DCA

 

  1. Higher transaction costs

When an investor systematically purchases securities in small amounts over a certain period, the risk of incurring high transaction costs arises. This is cause for concern because it can potentially offset the gains accumulated by the current asset in the portfolio. 

Regular activity of the interval payments will incur large fees over the long term period. Crypto exchanges generally charge fees when buying, selling, or trading crypto. These exchange fees are often a percentage of your trade and charged per transaction. For instance, Coinbase charges $0.99 for every transaction of $10 or less. 

 

  1. Asset allocation priority

DCA skeptics argue that using this strategy allows further uncertainty in such a volatile industry as they believe that an investment strategy should focus on the desired asset allocation to manage risk. It claims that target asset allocation parameters will take longer to be reached. 

 

  1. Low expected returns

In business, the theory of the risk and return dynamics is simple – high risk-high returns and low risk-low returns. Hence, adopting a DCA strategy to mitigate risk will always lead to lower returns. The market typically experiences longer sustained bull markets than the opposite. Thus, a DCA investor is more likely to lose out on the opportunity to have greater gains as opposed to an investor that puts in a lump sum.

Example Dollar-cost averaging

Let’s examine a clear example of DCA: say you invested $100 in Bitcoin every week starting on Dec. 18, 2017 near that year’s price peak, you would have invested a total of $16,300.

By Jan. 25, 2021, your portfolio would have gathered approximately $65,000 (299% ROI). In contacts. If you had taken that same amount of $16,300 and invested it all on Dec. 18, 2017, you would lose almost $8,000 throughout the first two years. 

What this shows is a missed opportunity to compound your profits. Yes, your portfolio would recover, but that could also put you off the whole thing entirely, causing you to sell. 

Dollar -cost averaging crypto’s major drawbacks still centers around less risk less reward. But in some instances such as trying to mitigate risk if the market crashes, DCA will serve as a risk management strategy. 

Takeaway

Some see crypto as a high risk high reward environment. But bull cycles and bull runs don’t last  forever so preparing yourself against that impending downturn is the best tactic against huge losses. And with that said, losing out on a few gains won’t hurt you. Professional investors understand that investing solely on the basis of profit, lump sum investments typically out performs DCA But waiting for waiting for the price of Bitcoin or Ethereum to fall is a fool’s errand. This is because factors like timing, emotion and risk appetite will play a big factor when the time comes. 

When you Dollar-cost Average, you’ll be getting the highs and lows. And seeing as bull runs tend to be more prevalent in the industry you’ll amass a comfortable profit over time. Your investments might not see the spike that you hope but to avoid loss as a result of uncertainty, DCA is a better option. 

(с) The article is written by Mike Emeruwa, 2022

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