DCA In Crypto Explained

Ahoy captain! Crypto, sometimes, can feel like you’re in a wooden ship on a turbulent sea.

There are big waves, small waves, and dramatic price swings that can rock the boat in unforeseen ways.

Nobody wants to buy at the top or sell at the bottom, but, you’d best believe it happens all the time.

What if, dear BONKbot readers, there was a strategy to help you weather the stormy seas and build a solid crypto portfolio sustainably.

Three magic words… Dollar-Cost Averaging (DCA). 

This article will guide you through DCA, how it works in the context of crypto, and why it might just be the right approach for you.

What Is Dollar Cost Averaging (DCA) In Crypto?

Dollar-Cost Averaging (DCA) is a fairly well-known and highly reliable crypto investing strategy whereby you:

1. invest a fixed amount of money

   
   

2. into a specific cryptocurrency

   
   

3. at regular intervals

   
   

4. regardless of the price

   
   

Think of it like this:

instead of trying to time the market and buy a large chunk of Bitcoin (BTC) when you think the market is low, you buy a small amount of BTC every week, every month, or whatever interval you choose.

Some people do it when their salary comes in, which seems pretty logical.

In the crypto context, DCA boils down to just consistently buying a set dollar amount.

This means you end up buying more crypto when the price is low and less when the price is high.

Over time, this can average out your purchase price, potentially reducing the risk of making a large investment right before a price drop.

Example Of Dollar-Cost Averaging

Let's illustrate what we’re getting at, with Bitcoin as our example. 

Imagine you have $1,200 that you want to invest in BTC over the next year. Instead of buying $1200 worth of BTC right now, you decide to use DCA and invest $100 per month.

Here's a hypothetical scenario:

After 12 months, you would have invested $1,200 and accumulated approximately 0.0314 BTC.

Now, let's say you tried to time the market and invested the entire $1,200 in Month 1 when BTC was $30,000.

You would have purchased 0.033 BTC. That would have been nice.

However, what if you’d waited for the market low, and you missed the dip in Month 4 when it was $20,000?

Suddenly it’s $40,000 in Month 5 and never gets that low again.

When you start is important, but more important is just getting started and sticking to it for the long term.

The market will move regardless, but if you commit to your DCA strategy, you will accumulate your investment over time. 

Does Dollar Cost Averaging Work?

While its effectiveness is up for debate, DCA remains popular, most likely because it offers some protection from the high volatility that is commonplace in the crypto world.

The following points are why DCA’s practicality is still being contested:

• It reduces emotional investing: DCA removes the pressure of trying to time the market. You're not constantly worried about buying at the peak, which can lead to impulsive decisions

  
  

• It averages out purchase price: By buying at different price points, you smooth out your average cost per coin. This can be particularly advantageous if you're investing in a cryptocurrency that experiences significant price fluctuations

  
  

• It’s an easier entry point: DCA allows you to start investing with smaller amounts, making it more accessible for beginners. You don't need loads of money to get started, just allocate a small bit of your salary or surplus income each month to your DCA strategy

  
  

• It potentially mitigates risk: By spreading your investments over time, you reduce the risk of buying a large amount of crypto right before a market downturn

  
  

DCA isn't necessarily about maximizing profits, it's more about minimizing regret and saving your sanity in a frankly crazy market.

How To Implement DCA In Your Investing

Actually, implementing DCA is quite straightforward. There’s no need to overthink it.

Here's a simple, step-by-step guide for a DCA BTC investing strategy:

1. Determine your investment amount: Decide exactly how much money you're comfortable investing in Bitcoin (or another cryptocurrency) over a specific period. For example, you might choose $50 per week or $200 per month

   
   

2. Choose your interval: Select how often you want to make your purchases. Weekly or monthly are common choices, but you can adjust based on your preferences

   
   

3. Select a crypto exchange: Choose a reputable cryptocurrency exchange that offers automated recurring purchases. Many popular exchanges like Coinbase, Kraken, and Binance now offer this feature

   
   

4. Enter your details: Combine steps 1-3 and proceed by specifying the cryptocurrency you want to buy (e.g., BTC), the amount you want to invest per interval (e.g., $50), and the frequency (e.g., weekly). Next, get ready to confirm your setup

   
   

5. Confirm and automate: Double-check your settings and accept your recurring buy order. The exchange will then automatically purchase the specified amount of BTC at your chosen interval. Your job here is done

   
   

Here’s an optional step, this one is totally up to you.

You may want to periodically review your DCA strategy to ensure it still aligns with your financial goals.

You can adjust the amount or frequency as needed.

Drawbacks Of DCA

While DCA offers several benefits, as we’ve clearly outlined, it's still not without its drawbacks, and that’s why more active and experienced traders tend not to use this strategy:

• Missed opportunities: If the price of the cryptocurrency you're investing in consistently rises, you might have been better off investing a lump sum upfront. DCA can lead to lower overall returns in a consistently bullish market

  
  

• Fees: Transaction fees associated with each purchase can eat into your returns, especially if you're investing small amounts frequently. Look for exchanges with low fees or consider consolidating your purchases into less frequent, larger transactions. This won’t be an issue with big exchanges like Binance and Kraken, but if you go for lesser-known platforms or through brokers, you will pay more

  
  

• Opportunity cost: The money you're using for DCA could potentially be invested elsewhere, such as in stocks or other asset classes, which might offer higher returns. This is something to be aware of

  
  

Here are some alternative investing strategies to consider:

• Lump-sum investing: Investing a large sum of money upfront, hoping to capture the full potential of a rising market. This is riskier but can be more rewarding, especially in a bull market.

  
  

• Value averaging: Adjusting your investment amount based on the performance of your portfolio. If your portfolio is down, you invest more; if it's up, you invest less. This is more complex than DCA.

  
  

Final Words

Dollar-Cost Averaging is a useful investment strategy for managing investment risk and building a sturdy cryptocurrency portfolio over the long term.

It's particularly well-suited for investors who are new to crypto, who don’t have a lot of free time to get involved and follow the markets, who want to avoid the emotional aspects of trading, or who are simply investing for the long haul.

However, if you're looking for short-term, high-risk, high-reward opportunities, DCA might not be the right fit.

If you're chasing quick wins and are comfortable with extreme volatility, exploring strategies like trading meme coins or utilizing tools like BONKbot (our Telegram trading bot) might be more appealing. 

Please be aware that some approaches carry significantly higher risk than others and are not suitable for everyone.

Do your research, and only invest what you can safely afford to lose.