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Dollar-Cost Averaging in Crypto Markets: Pros and Cons

cost averaging crypto

One of the best crypto exchanges in Australia to deposit AUD and set up recurring orders to purchase over 280 cryptocurrencies. A purpose-built exchange for Bitcoin investors that want to automate their crypto portfolio, Swan Bitcoin has DCA tools with direct payment using a bank account for as little as $10. An example of using dollar cost averaging for a cryptocurrency investor is to purchase $100 worth of Ethereum each week. If ETH costs $2,500, the investor could buy 0.04 ether with $100. It doesn’t seem like much, but next week, the investor would use another $100 to purchase 0.04 ether. According to some, however, it’ll actually make investors lose out on gains when the market is performing well.

In some places, crypto profits from short-term gains get taxed less favorably than long-term gains, playing a significant role in total returns. A long-term approach shields your funds from taxes, and if you wait until you retire before selling your assets you’ll pay even less tax. DCA’s purpose is to level out an investor’s average price they pay for an asset, their cost basis, over time.

What are the disadvantages of dollar cost averaging?

You could make a one-off investment, putting the total sum of your savings into bitcoin. However, you would have to time the investment to make sure that you weren’t taking on too much risk. The market could crash during the following week or month, in which case you’d be left with significantly less money from your initial investment.

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Your risk tolerance as well as your commitment to your long-term investment plan will determine which method is right for you. Let’s say you have $50,000 you’d like to invest in cryptocurrency. If the price of Bitcoin was currently $50,000 and you made a lump sump investment right now, you’d have one Bitcoin at a cost basis of $50,000. When Bitcoin’s price goes back up, your gains will be magnified because you lowered the average cost to acquire your holdings. With dollar-cost averaging crypto you’ll be acquiring more Bitcoin even during ups and downs.

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If you’re using a custodial crypto wallet, be sure it’s got a solid reputation and an established security track record. For more advanced users who are choosing to self-custody, there are many crypto wallets to choose from, including the BitPay Wallet. Buy and swap the most popular coins with BitPay to assist in your DCA crypto strategy. Beginners can also use DCA to invest over a longer period gradually. If prices at the end of each month were $100, $90, $80, $70, and $95, your average asset price would be $85.5.

The purpose of a buy and hold strategy is to enter the market and stay in the position long enough so that the timing doesn’t matter. Hold” strategy, where essentially the goal is to never sell, as the purchased assets are cost averaging crypto expected to continually appreciate over time. Take a look at the performance of the Dow Jones Industrial Average in the last century below. It could be a flat amount, a percentage of your paycheck, or something else.

So instead of making one hefty investment and risking the market crashing right after you make your investment, you could make smaller periodic investments and mitigate that risk. Of note, neither a DCA nor a lump sum investing strategy protects against market downturns. Either way, you may need to occasionally consider exiting or switching investments. Your regular periodic investment amounts would buy greater volumes of stocks, cryptocurrencies or other assets during market downturns. This would magnify your upside should a strong market recovery follow.

cost averaging crypto

Your asset allocation strategy plays a big role in knowing when you’ve bought enough and when it might be time to reallocate. More frequent purchases limit volatility’s effect on your portfolio, cost averaging crypto reducing risk, but can also slow performance when trends are bullish. However, you’ll need to complete one part of the transaction manually; eToro does not automatically buy crypto for you.

It can ensure that you’re already in the market and ready to buy when events send prices higher. Full BioCierra Murry is an expert in banking, credit cards, investing, loans, mortgages, and real estate. By contrast, dollar-cost averaging offers a way to invest in bitcoin, or another crypto, and still have a life.

A DCA strategy avoids the situation of putting their eggs in the basket all at once. Risk-averse investors have the flexibility to stop or postpone DCA at any time should they choose to. That goes double for crypto investing, where prices are not only more volatile than stocks, but can be impacted by a wide range of external, unpredictable factors.

For those who don’t mind actively managing the crypto market, they can manually DCA into cryptos when they notice favorable opportunities. Instead of buying cryptos at pre-set intervals, some DCA investors may wait for a significant correction to invest more of their cash. Some people who use DCA increase their purchases during a bear market and ease up during bullish periods. Dollar cost averaging in crypto refers to buying crypto assets on a fixed schedule with a fixed amount of capital. If prices dip, your fixed allocation buys more, prioritizing low-cost purchases.

The DCA strategy can start immediately and use a small amount of money to buy fractions of a Bitcoin, as opposed to saving up for a larger amount. DCA can be customized to suit the individual’s risk tolerance and financial circumstances. Cryptocurrency exchanges will often have a DCA option that allows the users to set up regular payments and recurring orders to obtain a specific or group of crypto assets. The premise is that by entering a market like this, the investment may not be as subject to volatility as if it were a lump sum (i.e., a single payment). Well, buying at regular intervals can smooth out the average price. In the long term, such a strategy reduces the negative impact that a bad entry may have on your investment.

cost averaging crypto

If you invested the full amount initially, you would’ve paid $100 per coin. The aforementioned advantages are promising, but there are a couple of drawbacks when it comes to dollar-cost averaging. The first one is that investing all at once can result in better returns, mainly because your assets are in the market for a longer period of time. This is based on the idea that the longer your assets are in the market, the better your returns are in the long run. It should also be noted that dollar cost averaging is more appropriate as a long-term strategy rather than trying to capitalize on short-term gains or losses.

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DCA helps you buy more when prices are low and less when prices are high. While stocks certainly experience intraday and weekly volatility, cryptocurrencies like Bitcoin can experience hourly price volatility. The volatility of Bitcoin and other cryptocurrencies have already made investing in cryptocurrency a “risky” bet given the unpredictability of the market. With prices fluctuating so rapidly, it’s tough to know when to buy and when to sell.

  • Beginners can also use DCA to invest over a longer period gradually.
  • The table below shows the half of Joe’s $100 contributions that went to the S&P 500 index fund over 10 pay periods.
  • But, this strategy is only right for you if your unique investment circumstances allow for you to invest in the long-term.
  • The answer to this question doesn’t only depend on the state of the market but also a particular investor’s trading experience and long-term goals.

With “advanced” dollar-cost averaging, you take on a slightly more active role with the aim of buying more when you think the price is undervalued, and less when you think it’s overvalued. To help inform your decision-making, you can take advantage of ‘technical analysis,’ which is the discipline of identifying trading opportunities based on past market data and statistical trends. You can stop dollar cost averaging when you’ve reached your target asset allocation.

cost averaging crypto

By not looking at the price and having your eyes on the long term, you put these feelings to rest. Of course, it is really nice to understand how DCA works, but the most important thing is to apply the method. The most common way to apply DCA is to invest a certain amount of money in assets each month. This is because most people LINK invest part of their salary and the salary is deposited on a fixed day.

What is the best day to DCA crypto?

Although you can trade cryptocurrencies at any time of day, the market is more active during typical work hours and less active early in the morning, at night, and on the weekends. Generally, cryptocurrency prices start low on Monday and rise throughout the week.

You would have to time your purchase exceptionally well to buy an asset at the bottom – right before the start of a bull market. Instead of investing $10,000 in a one-off purchase and risking a sudden drop in the purchased asset’s value, you could make ten investments of $1000. You’ve invested 1,200 €, so you might expect to have 12 coins worth 100 € each. But with cost averaging, your monthly investment earns you more coins when the price is lower.

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For those that don’t know when to buy crypto, DCA is a simple approach for beginners to start small and grow an investment without the worry of volatility or price swings. When an investor is bullish on a crypto asset for the long term, DCA can make sense because it allows the investor to continue to build up the portfolio using manageable amounts of fiat currency. If the asset value begins to decrease, the individual can stop the DCA strategy to reduce exposure. In the traditional finance world, dollar-cost averaging is a time-honored investment strategy that involves purchasing set amounts of stock at regular intervals, whether the price is high or low. This strategy allows you to reduce your average purchase price on the shares.

Does average cost matter in crypto?

Dollar-cost averaging is a strategy used for investing in assets. You can use this strategy as a cryptocurrency investment strategy, but also with stocks, commodities or bonds. The investment product doesn't matter, the strategy is so simple that you can apply it to any market.

Dollar-cost averaging can very quickly become a “set it and forget” strategy, especially if you automate the monthly investment allocation. Cost averaging – often called dollar cost averaging or DCA – is an investment strategy in which you build your portfolio by investing equal amounts at regular intervals. For example, you might purchase 100 € worth of Bitcoin every week or every month.


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