How does the dollar cost averaging (DCA) strategy work in crypto?

February 8, 2024
6 min read
DCA

As with the stock market, an investor can employ numerous strategies. One of the most well-known methods is Dollar Cost Averaging (DCA). This strategy provides structure and takes some mental load off. This article explains what DCA entails, how it works in the crypto market, the pros and cons of this investment strategy, and some alternative methods to invest in Bitcoin and other crypto.

What is Dollar Cost Averaging (DCA) and how does it work?

Dollar Cost Averaging is an investment strategy where investors invest a fixed amount at fixed times. For example, every first day of the month, or weekly on Friday mornings, or whatever you prefer. In doing so, investors do not look at the current price of the stock, or the crypto. This strategy is certainly not new and has been around on the regular stock market for decades.

The idea behind it is simple but powerful. Timing the market is something almost no one can do. Even professional investors don't have a crystal ball. By buying at a fixed time, a person buys both highs and lows. Ultimately, the average buying price (cost basis) is, well, fairly average. This somewhat reduces the risk involved in price fluctuations.

how DCA affects cost basis
How DCA affects cost basis (fictitious figures)


An additional advantage of the DCA method is that an investor has more peace of mind: there is a set plan, and they stick to it. They don't have to re-evaluate and research their holdings every month to see if they are comfortable with the current market price.

How DCA works when investing in crypto

To begin applying the DCA strategy in crypto, it is important to make three choices:

  • At what interval and when will I DCA? For example, once a month, perhaps on the day your salary arrives? Or maybe at the end of the month, when all your bills have already been paid. Keep in mind that if the interval is very short, fees regarding your purchases, such as your broker's commission fees or blockchain fees will be paid more frequently. Sometimes, depending on the applicable fees, it is wise to buy less often for a higher amount, rather than very often small amounts.
  • What's the amount I want to invest? The main rule in personal finance is to never spend more than you can afford to lose. With investing, there is an inherent risk of loss of value. Look carefully at your income, expenses, and financial goals. And never base your decisions on FOMO.
  • What cryptocurrencies do I invest in? Just Bitcoin? Maybe Ethereum as well? Or other altcoins perhaps? It is important to do your own research on which cryptocurrencies can be a good addition to your investment portfolio, matching your risk appetite.

After all three choices are made, you can begin investing in crypto.

The pros and cons of the DCA strategy

Like any strategy, DCA has some notable advantages and disadvantages. The advantages of DCA include:

  • Risk management: by staggering the moments, there is less chance that someone will only buy additional at peak moments.
  • Peace of mind: sticking to a schedule avoids impulsive decisions and the need for periodic in-depth price analysis.
  • Simplicity: it is incredibly easy to apply DCA, making it very suitable for novice investors.

One disadvantage, as mentioned earlier, is the potential cost. When someone buys regularly, buying costs are also incurred regularly. If there's a fixed commission for each purchase, this may have an even bigger impact on potential returns. Suppose that the fixed cost per purchase is two euros, then it would be relatively expensive to DCA with ten euros each week. While if you buy for a hundred euros each month, the two euros fee doesn't seem so bad.

Another disadvantage is that opportunities may be missed by sticking to the fixed schedule. Has the price of a crypto dropped a lot but you decided to stick to the schedule? You may have missed a good opportunity.

What is a good DCA strategy in crypto?

What constitutes a good strategy depends entirely on an investor's risk appetite, financial situation, and personal preferences. There is no one right answer to this question. Some general tips are to make informed choices, keep an eye on costs, and regularly assess whether the current DCA strategy is still appropriate for your situation.

Alternative trading strategies in crypto

Of course, there are countless strategies. And there are all types of spins and twists on well-known strategies as well. Some approaches often mentioned among crypto investors include:

  • Lump sum investing: investing the entire capital at once. This reduces acquisition costs and allows the entire amount to (hopefully) grow instead of sitting in a low-interest savings account. This is a very advantageous choice when market prices are very low and will rise a lot. However, if everything is invested at once, and prices fall after this, then your cost basis cannot be reduced either since you're not doing additional buys. Generally, this method is considered riskier than DCA.
  • HODLing: holding the crypto regardless of market volatility. Requirements: a lot of confidence and patience.
  • Day trading: for those with enough time and interest, it is also possible to day trade. This involves frequent buying and selling every day in response to price fluctuations. For day trading to be successful, an investor usually needs professional instruments and technical knowledge. Without that, it is basically gambling.
  • Swing trading: someone buys positions for a few days to a few weeks. It is less volatile than day trading, but still a lot more active than HODL'ing. Swing traders often use fundamental analysis to base their decisions on.
  • Asset management: for those who don't want to be concerned with crypto prices or evaluating which crypto should be in the portfolio. With crypto asset management, money is invested (which can be lump sum, DCA, or just whenever convenient) with which the asset manager buys and sells crypto on behalf of the investor.

Whatever strategy a person chooses: no method is entirely without risk. This is true for crypto, but equally true for traditional financial markets. Above all, choose something that suits your situation. DCA is an approachable method that anyone can apply without technical knowledge and best suits an investor with a longer horizon.

The information provided in our articles is intended solely for general informational purposes and does not constitute (financial) advice.

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