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Table of Contents

TL;DR

What Is DCA, and How Does It Work?
Compared to Timing/Buying the Dip

Example of DCA Using Bitcoin
Potential Drawbacks of DCA Strategy
Final Thoughts

Entering the crypto world can feel like learning a new language with so much industry-specific terminology. DCA in crypto stands for dollar-cost averaging, the concept of investing your money at intervals, regardless of the market’s movement.

So, whether you inherited a trust fund or are looking to invest a portion of your paychecks, using a DCA crypto strategy can be a potentially lucrative and passive way to make long-term profits.

TL;DR

Dollar-cost averaging in crypto is the concept of investing money at predetermined intervals to average your buy-in cost. You’ll systematically invest at regular intervals with the goal of getting a better return since it’s difficult to time the market. However, you may miss out on profit compared to investing a lump sum of money when the price of a crypto asset is low.

What Is DCA, and How Does It Work?

If you’re familiar with investing in the stock market, you might be familiar with this investing strategy.

DCA in crypto is the same concept as dollar-cost averaging in any asset. It’s a more passive way to invest and has a low barrier to entry for people who’ve never invested their money.

The reason being is that DCA doesn’t require an investor to read charts with the hope of making their best-calculated guess for buying crypto low and selling high. Such situations require years of trading knowledge and experience. And even then, many crypto technical analysts won’t be right a lot of times.

In contrast, by using a DCA crypto strategy, you won’t have to spend hours per day staring at your computer. Instead, you can approach DCA via one of the following strategies:

Manually purchase cryptocurrencies on predetermined dates
Set up a recurring buy with your crypto exchange
Use a bot to make DCA purchases
If you want the most passive and economical option, signing up for a cryptocurrency exchange that offers recurring buy choices is the best option. DCA bots like 3Commas are equally passive, although most programs involve monthly or annual fees. 

Alternatively, you can manually set buy orders for cryptocurrencies. But we caution you to take care if you choose this method because it’s easier for human emotion to get in the way, avoiding a purchase if the crypto price doesn’t meet your expectations. 

There’s no right or wrong approach when it comes to DCA frequency for your cryptocurrency. Examples of intervals that people use are:

Weekly
Monthly
Quarterly
On the “x” day of every month
Many cryptocurrency exchanges and bots will even let you set the specific time you want them to purchase your cryptocurrency.

Compared to Timing/Buying the Dip

Every experienced investor knows it’s impossible to time the market. While there are undoubtedly people who’ve made lucrative money buying a dip and selling high, it’s impossible to strike such luck every time.

Technical analysis can help experienced crypto traders manually place trades that have a relatively better chance of being profitable. But even then, there are too many variables to guarantee this.

Some reasons why it’s so hard to time the crypto market, making some people turn to DCA strategies is because:

Global financial uncertainty
Influencers falsely inflate a coin’s value
An asset can plummet from bad company news
News of high inflation, war, or any other situation that causes the stock market to crash often has a similar (if not, larger) impact on cryptocurrency. One of the best examples of this is the March 2020 crash, when Bitcoin fell 41% from $7,900 to $4,600 in one day.

© CoinGecko

Had you invested a large sum of money when Bitcoin was at $7,969, you would have been devastated the following day. But if you were using the DCA method, you may have bought Bitcoin at around the $7,969 mark, but you also would have been buying it once it crashed and recovered, helping to average your buy-in price.

Although the only thing certain in the crypto world is that nothing is certain, historically, there tend to be more crypto downtrends on the weekends. A theory for this is that banks don’t operate on the weekends, so there’s less crypto trading volume since fewer people have access to their money.

So, while there’s no way to time the crypto market, some people choose to set up their DCA strategy to make purchases on the weekends.

Example of DCA Using Bitcoin

Let’s look at an example using the price of Bitcoin on January 1st between the six-year period of 2018 to 2022.

The price of Bitcoin at these times was as follows:

Regardless of the amount of money you invested into Bitcoin on January 1st of each year, as long as you invested the same amount each time, your average buy-in price would be about $17,100.

Now, $17,100 is clearly a lot more than $997.69. But the chances of you timing the market—and having six years’ worth of upfront investing capital—is slim. So, a $17,100 average buy price is still significantly higher than if you were to invest a lump sum of money on January 1st of 2021 and 2022.

Potential Drawbacks of DCA Strategy

Although there are many benefits to the DCA crypto strategy, it isn’t a fool-proof method. One of the most significant reasons is in the example we described above.

By using DCA to purchase your cryptocurrency, you’ll run the possibility of purchasing an asset when it’s exceptionally high. 

DCA also doesn’t account for any good news or upgrades a coin might undergo, which often raises the price temporarily. The asset then usually drops after the hype dies down. But if your DCA strategy involved passively purchasing a coin during the hype, you’ll have significantly increased your average buy-in price.

Some other potential drawbacks to using DCA in crypto include:

Not ideal for short-term investments
Lower reward potential compared to spot trading
May incur higher purchase fees
While DCA can work for short-term cryptocurrency trades, the strategy is best for people who plan on holding their crypto assets for the long term. That’s because, as you saw in Bitcoin’s massive yearly price difference in the chart above, dollar-cost averaging over the years will allow you to buy at more lows in addition to highs.

In contrast, using DCA in the short term could cause you to purchase an asset at an increasingly higher price, especially if it’s a bull market. So, short-term traders might make better profits by using spot trading methods.

Finally, most cryptocurrency exchanges operate off a tiered scale for their trading fees. Therefore, if you invest small amounts of money intermittently, you might pay more in maker or taker fees than if you purchased an asset with the same amount of money in one lump sum.

Final Thoughts

Dollar-cost averaging helps remove the emotion of FOMO—fear of missing out—from buying cryptocurrency. 

DCA methods don’t result in extraordinarily high returns. However, it’s an often effective and relatively safe option for traders wanting to build a long-term crypto portfolio. 

Lastly, doing due diligence to ensure you invest in a cryptocurrency you believe will survive in the long term is vital while remembering that crypto is a volatile market, and no one can guarantee returns.