Dollar-Cost Averaging – Is It a Viable Crypto Investing Strategy?

dollar cost averaging crypto

Unlike stocks, cryptocurrencies are known for drastic price swings on a daily or even hourly basis. Any investment can be subject to volatility, which can cause uncertainty, fear of missing out, or generally poor emotional investing decisions. So how do you know when to buy certain security when the price fluctuates? In an ideal world, buying low and selling high is the best strategy. In reality, it’s much harder to accomplish even for professionals. 

Dollar-cost averaging (or “DCA”) is a strategy used to reduce market volatility by investing small amounts into an asset – like gold, crypto, or stocks, on a regular schedule, rather than attempting to “time the market.”. DCA is a good choice for those who believe their investments will increase in value over time and experience volatility along the way.

What Is Dollar-Cost Averaging (DCA)? 

DCA is a long-term strategy in which investors buy smaller amounts of an asset over time, regardless of its price. For instance, instead of investing $1,200 all at once, you invest $100 in Bitcoin every month. Depending on the goals, DCA can last for just a few months multiple years – depending on their schedule.

The essential premise of this strategy is that your time in the market beats your timing in the market. This strategy has been used for decades by traditional investors to weather volatility in the stock market. It is often associated with passive investing strategies, where the investor wants to minimize time spent on portfolio management. It is common for dollar-cost averaging to be applied to pooled investment vehicles such as mutual funds, index funds, and ETFs. However, the strategy is just as practical in the cryptocurrency space.

Historically, this has worked extremely well for all the major coins like Bitcoin or Ethereum. This is because investors who use this strategy prioritize the number of their assets instead of their dollar value. Many Bitcoin holders also refer to this as HODLing, which is a popular acronym for “Hold on for dear life.” in the crypto community

What Are The Benefits Of Crypto DCA?

Using DCAs can be a good way to own crypto without having to learn how to time the market or risk investing all of your money at the wrong time. It can mitigate the effects of a sudden drop in prices on a given purchase by “averaging” out the cost of the purchase over time. Should the market fall, DCA investors can continue to buy as planned with the possibility of earning returns once the market recovers.

Aside from monetary profit, DCA has a number of additional benefits. Here are the top reasons why your time in the market beats market timing.

No More FUD or FOMO – From stocks to crypto, prices are always unpredictable. It is impossible to predict what will happen in the future as no one has a magic crystal ball. No matter how many people claim to know the exact bottom of a dip, they’re all just guessing. It is unreliable to count on just a hunch, which is how most people invest due to our gambling brain. Although with DCA you’re still counting on the market going up in the long term, it is the only variable you have to worry about.

No Emotional Roller Coasters – Talking of worries, DCA can actually save you a lot of sleepless nights. It is easy for the market to play on our emotions to the detriment of any serious investment analysis. Our tendency is to jump out too early or stay in too long. As outlined in Behavior Gap by Carls Richards “It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right – but it’s not rational.”

Save On Fees – In conventional trading, fees are high, especially in crypto! Users on the Ethereum network report ridiculously high gas fees for simple transfers. In extreme cases, these fees can climb up to hundreds of dollars. This is all due to the congested blockchain network. However, with a responsible DCA plan, your coins sit in a hot/cold wallet and you don’t need to lose money on said fees.

Is DCA Better Than Lump-Sum Crypto Investing?

The answer is—it depends. As Warren Buffet once put it: “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” Despite diversification being a different concept from DCA, Buffet’s summary applies the same. 

The truth is that lump-sum investing has a much higher potential and generally outperforms dollar-cost average investing. However, although hard to admit for some, most of us are simply not as skilled as Buffet. 

Investing takes a lot of knowledge and skill. To acquire these skills one needs to put in a lot of effort. DCA is simply a solution for those who know what they want and look to make a passive income in the long term.

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