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How to use Dollar-Cost Averaging (DCA) for Crypto Investing

Learn about what is DCA and how to apply DCA to your cryptocurrency investment plans for the best returns.

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When it comes to crypto investing, there are different investment options available, ranging from short-term ones like trading, to mid to long-term ones like a cryptocurrency savings plan. Usually, the investment option and accompanying strategy are decided by your risk tolerance. In this article, we’ll be looking at a strategy and investment approach that will enable anyone, regardless of risk tolerance, to diversify your investment portfolio to include cryptocurrency — Dollar-Cost Averaging (DCA).

What Is DCA (Dollar-Cost Averaging)? 

Dollar-cost averaging is a common investment strategy in traditional investing. It means you split up the total planned investment amount across periodic purchases of your chosen asset. As a mid to long-term investment strategy, the goal is to reduce the volatility risk and ideally lower the average cost of your investment. 

DCA in crypto works pretty much in the same way as in traditional investing. As volatility is an area of concern for most crypto investors, DCA investing lets investors smooth out the short-term volatilities in the crypto market while capturing the long-term returns crypto offers. 

For example, you can adopt a DCA approach to investing in bitcoin. You could choose to buy 100 EUR worth of Bitcoin every month, regardless of the coin’s current performance. Using the DCA approach takes the emotion out of your investment strategy, removing the pressure of finding the perfect time to invest. It works well even for beginners in investing, although you should do some research around the asset you’re looking to purchase before committing.

Table 1: Comparison of DCA vs Lump Sum
Table 1: Comparison of DCA vs Lump Sum

DCA in Cryptocurrency

Because no one knows whether the market is going to go up or down, dollar-cost averaging offers investors a way to mitigate the volatility of going all-in at once. Many investors “sit” on their capital for too long as they wait for the perfect moment to buy into the asset they’re considering. 

This is especially relevant when the market is rapidly going up or down. Investors can let their emotions get the better of them as they face the fear of losing their investment or the lure of becoming a millionaire overnight. 

“Casual investors have a tendency to buy into the hype cycle and sell when the losses become a reality,” Adam Traidman, CEO of BRD, tells on his interview with CNBC Make It. “It’s crazy, illogical thinking, but it happens all the time. Why would people buy high and sell low? Well, they don’t want to, but they sell out of fear.” 

In order to avoid impulsive decision making, Traidman chooses to adopt a DCA strategy when buying bitcoin. He buys a little bit of bitcoin every few days, regardless of the cryptocurrency’s price. In his case, bitcoin is a long-term investment where the historical price performance charts shows that the cryptocurrency will return in the long run. 

What Coins Work With a DCA Strategy?

Deciding how much to DCA bitcoin or other cryptocurrencies is largely dependent on your individual budget and investing preferences. 

However, one thing many investors agree upon is the importance of choosing to invest in top-quality coins. These should have a track record of steady growth, along with a high market cap and trading volume, instead of taking moonshots with the hope that the coin will appreciate 100x in value. After all, a 30% increase in value, even on 0.01 btc, is definitely more valuable than owning hundreds of small coins that may be worthless.

If the volatility of the crypto market still leaves you uncomfortable, you may want to consider a DCA approach that’s centred on stablecoins. Stablecoins like USDT and USDC offer a higher yield, due to demand from traders and DeFi investors as a safe haven and a source of collateral. As stablecoins are pegged to the USD, you’ll have the reassurance that they’ll maintain their value, unlike typical cryptocurrencies that are subject to market volatility. 

Depending on your budget, you can gradually increase your stablecoin deposit through DCA, enjoying a constant rate of healthy returns that provide a steady stream of passive income

Advantages Of Dollar-Cost Averaging

One of the greatest perks of DCA is that by spreading your investments over multiple purchases, you’ll be able to take advantage of dips in the market. This is particularly the case during a bear market. As you’ve already committed to regular purchases of your chosen cryptocurrency (e.g. bitcoin), you’ll be able to get more bitcoin for your money, as the market is down. 

Disadvantages Of Dollar-Cost Averaging

On the other hand, DCA is significantly less effective in a bull market, as prices are rising. This means that you’ll be getting less cryptocurrency for your cash, as opposed to a bear market. As a result, you’ll find your investment less profitable. On top of that, you might find yourself paying more in transaction fees, as you’ll be making more purchases by using the DCA strategy instead of a lump sum approach. 

However, as a crypto investor, you’re adopting a long-term bullish approach to your chosen crypto investments, with the conviction that prices will keep going up.

In the next section, we will take a look at setting up a bitcoin DCA strategy, with reference to the last six months.

Applying a bitcoin DCA Strategy

BTC Price Chart over the Past 6 Months

Assuming you had invested $1,000 monthly in bitcoin every 23rd of the month over the past six months, here’s what your investment would look like:

Table 2: Applying DCA to BTC over 6 months

At its six-month high in October 2021, for $1,000 you would only be able to buy approximately 0.016 BTC. However, during the low in July 2021, you would be able to buy almost twice as much bitcoin for the same price. 

Ultimately, your purchase would average out to approximately 0.022 BTC per month, without having to worry about timing the market. Through DCA, you’ll be able to steadily increase your bitcoin holdings through regular small purchases that protects you from the volatility of the crypto market. 

Start Dollar-Cost Averaging and Earning With Cabital

If you’re ready to start dollar-cost averaging your bitcoin investment, it’s time to start looking into ways to buy BTC. While credit cards are convenient, bank transfers are usually cheaper, as you’ll be able to save on card fees. Even then, you need to check on the exchange rate, as well as any additional advertised fees. 

Cabital’s Buy & Sell feature has one of the lowest conversion spreads, so you pay less when buying cryptocurrencies. On other platforms and exchanges, you could be paying as much as 8% in conversion spreads, coupled with longer processing times of up to three days.

Table 3: Why you should buy crypto with Cabital

If you’re based in Europe or the UK, Cabital offers SEPA, Faster Payments (FPS) and Plaid as payment options. Once you’ve deposited EUR or GBP, you’ll be able to easily convert your fiat money into the cryptocurrency of your choice. 

You also want to think about how you’d like to store your cryptocurrency. While wallets are a common storage solution, the disadvantage is that you won’t be able to earn any interest on your holdings.

Instead, you might want to consider a crypto savings account like Cabital Earn. That way, while storing your cryptocurrency, you’ll be able to generate a steady stream of interest on your holdings. You could also further diversify your crypto investments to take advantage of the competitive interest rate Cabital offers for 30-Day USDT deposits — as a stablecoin that’s pegged 1:1 with the USD, the USDT is also less susceptible to market volatility, since its value remains constant. 

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