Dollar-Cost Averaging Explained: The Art of Crypto Trading Without Trading

cost averaging crypto

Dollar-cost averaging means making smaller, equal buys on an ongoing basis, instead of making large or irregular crypto buys. By regularly buying your favorite coins, you’ll be automatically investing more over time no matter what’s going on in the crypto market. This enables you to grow your holdings, and can lower your overall cost-basis during dips.

He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. “Unless you have deep conviction about bitcoin, you can’t buy and hold this stuff very well” and are liable to sell in a panic when the price dips. In this article, find out more on how DCA works, the pros and cons, and how to easily set it up.

Key Point 2: Setting a Budget for DCA

So, if you’re the type of person who’s just looking to make a quick buck, dollar cost averaging might not be for you. Imagine you as a hypothetical investor decides to invest $100 per month into Litecoin. If the price is $25 in month two, you’d buy 4 LTC, and if it’s $100 in month three, you’d buy 1 LTC, leaving you with a total of 7 LTC at an average price of $42.86 per coin. Part of what makes cost averaging work is that you accumulate more assets when prices are low.

Dollar-cost averaging is a strategy that involves investing small portions in regular increments over a period of time. Even so, most investors don’t have a large chunk available to invest in one go. However, they may be able to invest small amounts over the long-term – dollar-cost averaging can still be a suitable strategy in this case. The data below from dcaBTC shows the total value of investment when $10 Bitcoin is purchased weekly for three years, starting in 2019.

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Implementing dollar cost averaging works during times when the price is both high and low. Starting DCA at the start of a multi-year bear market can take longer to recover the unrealized losses. Therefore, the individual must still know the crypto market and its cycles to purchase a crypto asset using DCA. Dollar-cost averaging is a purchasing strategy which can lead to better results than attempting to time the market. Instead of buying all your funds in one go, the idea is that you break it up into a series of smaller purchases which you make at regular intervals. The goal is to reduce your exposure to market volatility and help lower your purchase costs and increase your returns.

Let’s see how DCA works and why you might want to consider using it. A great feature of DCA is that it allows investors to easily adjust it to suit their preferences. In fact, many CEXs allow customers to set a DCA schedule for a hands-off investment strategy.

How much will you invest?

Dollar-cost averaging may be better for your crypto portfolio – and your soul – than active trading. For the DCA method, it is useful to choose a cryptocurrency that you expect to exist and increase in value in the future. This is why Bitcoin or Ethererum are often chosen, as these cryptocurrencies are considered the most stable crypto projects.

  • However, you’ll pay a spread, which varies by the type of cryptocurrency you’re buying.
  • While the DCA can be employed for both buying and selling securities, Bitcoin investors typically don’t use it for selling but rather to accumulate the digital asset throughout regular intervals.
  • Unlike most crypto exchanges, eToro lets you purchase equities and exchange-traded funds as well as popular cryptocurrencies, so you can manage a wider range of asset types on one platform.
  • Several trading exchanges offer recurring buys which can be convenient.

As an investor, you should therefore have confidence in the investment product you are going to invest in via the DCA method. DCA has some main features but also has room for your own interpretation. Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.

Manage your portfolio –wherever you are

Obviously, you will need to tailor your strategy to your specific investment and financial goals. As a general rule of thumb, the most popular dollar-cost averaging strategies are monthly rather than weekly or daily. This helps reduce trading fees and also eliminates any temptation to time the market.

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This method is often used when investing in crypto, but you can also use DCA when selling your assets. The strategy remains largely the same only the difference is that you press the sell button instead of the buy button. Besides that, it is a very simple method, which can be used by both beginners and advanced investors. cost averaging crypto The fact that it is possible to automatically execute the DCA through various exchanges makes this method both technically and mentally easy. Using the DCA method has several advantages for crypto investors. Because the crypto market is enormously volatile, euphoric and sad feelings alternate at lightning speed.

Dollar-cost averaging Bitcoin can be beneficial as it allows you to obtain an average that will minimize the risk of buying too high in lumps. In addition, DCAing into stablecoins can help to smooth out the bumps in your investment journey. Overall, DCAing into cryptocurrencies can be a helpful way to invest if you are worried about market volatility. Choose a funding source for your trade, then choose an amount for the trade and a cryptocurrency you want to buy.

cost averaging crypto

“Mooning.” If the asset you’re investing in never goes down, you may have been better off just buying all at once. This approach can be applied across a range of assets, including crypto. Here at our records indicate that over the last 5 years, buying Bitcoin every week has performed better than timing the market 82% of the time. In the above examples, we relied on “set it and forget it” dollar-cost averaging.

Does average cost matter in crypto?

Dollar-cost averaging is a strategy used for investing in assets. You can use this strategy as a cryptocurrency investment strategy, but also with stocks, commodities or bonds. The investment product doesn't matter, the strategy is so simple that you can apply it to any market.

Joe bought different share amounts as the index fund increased and decreased in value due to market fluctuations. Dollar-cost averaging may be especially useful to beginning investors who don’t yet have the experience or expertise to judge the most opportune moments to buy. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.

The second leg is paying down the mortgage to build equity in a home. “You’re going to be forced to make that payment … because you want to keep the house,” Klippsten said. In other words, an investment thesis does not demand the same level of devotion as getting married or joining the French Foreign Legion. It is not intended to offer access to any of such products and services. You may obtain access to such products and services on the App.

  • This way, you can build up your crypto portfolio without looking back.
  • Even where the lump sum strategy posted a loss, the dollar-cost averaging manages to generate a profit.
  • Your portfolio will grow with little attention, effort, or inconvenience.
  • The aforementioned advantages are promising, but there are a couple of drawbacks when it comes to dollar-cost averaging.
  • Heading into its new dollar-cost averaging strategy, for example, El Salvador had purchased a total of 2,381 Bitcoins at an average price of $43,357.

Even if a crypto falls dramatically after making an initial investment, a DCA investor will bring their cost basis down every time they buy a dip. Of the many crypto investing strategies, dollar-cost averaging has become increasingly mainstream. Although investors can use DCA to buy any asset class, this straightforward technique is incredibly influential in the volatile crypto market. Indeed, DCA is so common in crypto that many centralized exchanges now offer functionality specific to enabling DCA.

Despite the fact that you invest in a relatively safe way XRP with dollar-cost averaging, you still have no guarantee of a positive return. That’s why you should always keep in mind that you can also lose your investment and never invest with money you can’t afford to lose. For those wanting to explore timing the market, cost averaging crypto our University article How to Read Crypto Charts — A Beginner’s Guide is an intro to technical analysis. While the overall idea of regular buys remains true, there are a few other things to consider before jumping in. In the scenario we’ve described, you have been saving up $100 per month for seven months, and you notice that the price of BTC is at its lowest point over the last year.

cost averaging crypto

It’s easy to sing the praises of DCA, but is the strategy really GMT better for crypto? In more than one study, including Vanguard’s oft-cited study and another from the CFA Institute, immediate lump sum investments outperformed DCA strategies over time. On eToro, you can set up recurring deposits, but the platform asks you to choose an investment each time rather than automatically buying for you. When you receive a notice that your recurring deposit was successful, visit eToro or use the mobile app to make your purchase. With funding fees of up to 3.99%, it’s cheaper to fund deposits directly from your bank rather than use credit or debit cards. Uphold does not charge a trading fee, but instead uses a spread fee, which varies by crypto type.

how much is one bitcoin in dollars

It may be wiser to divide your saved money into 10 smaller monthly investments of $1,000 each. Although this technique does not necessarily ensure a better return on investment, it would definitely mitigate the risk of short and medium-term market conditions. Some of these investments would most likely be made in uptrends, while others would be made in downtrends. However, it is still best to utilize technical analysis and fundamental analysis to ensure you do not start dollar-cost-averaging at the beginning of a long-term downtrend. Let’s say you have $10,000 set aside, which you can afford to invest in crypto.