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Dollar-Cost Averaging in Crypto Markets: Pros and Cons

The YouHodler Team
April 29, 2022
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The fear of investing at the wrong time and the fear of missing out (FOMO) are real concerns in crypto. Luckily, a technique called dollar-cost averaging (DCA) might reduce such tensions. It is an investment technique whereby investors split the amount of money invested over some time rather than in one instance. DCA is a good technique for both stocks and cryptocurrencies such as Bitcoin. It has many positive elements if you want to decrease any worries about investing or selling at the right time.

What is dollar-cost averaging (DCA)?

Dollar-Cost averaging is a widely used technique by investors. Such investors pour their capital into a stock or cryptocurrency at regular intervals. As some investors prefer to spend time on something else rather than analyzing the market, this could be a worthwhile strategy. The detailed work of carefully timing your investments would be out of the window. It helps the average investor to have a fixed plan for his investments, no matter the price. Volatility has less impact on your decision, especially with cryptocurrencies. Therefore, investments are dictated by time rather than the share price. 

Generally speaking, it is also a strategy that works in the long-term given that stocks or cryptocurrencies are bought over some time. DCA can be employed when buying Bitcoin or any other cryptocurrency. You could, for example, choose to invest $100 every week in Bitcoin. The main benefit is that it takes the emotion out of investing. When the price of an asset falls, it is difficult to rationalize buying more of that asset. DCA helps you buy more when prices are low and less when prices are high. 

Over time, this should result in an average cost per unit that is lower than if you had just made a lump-sum investment at the start. Of course, there are also situations where DCA may not be your best option. Dollar-cost averaging does not protect you from losses in a falling market. It also reduces the size of those losses. For example, if you invest $100 per week for 52 weeks and the market falls by 50% over that period, your total investment will be worth $2600 -- still a significant loss. DCA can also work against you if the market is rising quickly. In this case, you could buy more units when prices are high and fewer when they are low.

Benefits of dollar-cost averaging

There are several benefits of DCA for the average investor. This is especially true for cryptocurrencies:

  • DCA takes the emotion out of investing: When the price of an asset falls, it can be difficult to rationalize buying more of that asset. DCA helps you buy more when prices are low and less when prices are high. Over time, this should result in an average cost per unit that is lower than if you had just made a lump-sum investment at the start.
  • DCA suits long-term strategies: Given that stocks or cryptocurrencies are bought over some time, DCA is more beneficial for those with a long-term mindset. 
  • Numb yourself from volatility: As everyone knows, cryptocurrencies are volatile. However, if you DCA in cryptocurrencies such as Bitcoin, it helps you obtain an average that will minimize the risk of buying too high in lumps. If you buy cryptocurrencies over some time, your standing, in the long run, will numb the anxiety that volatility produces in the short term.
  • Removing FOMO: If you would like to invest in cryptocurrencies but you are still unsure how to do it, dollar-cost averaging can prove to be your solution. This is also true when you are not sure whether you are buying an investment at a low or high price, but want to make sure that you enter the cryptocurrency space so as not to miss out.
  • Less research: If you are one of those people who believe in cryptocurrencies as a long-term solution but do not have to research the space DCA might help. Since you are not buying any cryptocurrencies based on the current market space but rather based on time, it will reduce the time spent conducting detailed research.

Dollar-cost averaging out of the market

It is important to note that DCA is not just for buying into the market, but also for selling out of the market. If you have a portfolio of cryptocurrencies that you want to sell, you can use DCA to sell them over some time. If one is unsure of what the top is, one can use this technique to get out of the market bit by bit. 

It reduces the time spent calculating what the top of a cycle might be. If you don't want to be too greedy and still have cash on hand when you need it, it can be a vital strategy. DCA buying during a bear market and DCA selling during a bull run can help you take advantage of both sides of the market. If you want to use DCA but are worried about the volatility of cryptocurrencies, you can always use stablecoins. These are digital assets that are pegged to a fiat currency or other asset, such as gold. This means that their value does not fluctuate as much as Bitcoin or Ethereum. As a result, "DCA'ing" into stablecoins can help to smooth out the bumps in your investment journey.

Dollar-cost averaging Bitcoin: Can you do it?

In a short answer, yes. 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.

So how do you get started? YouHodler is a great place to buy crypto for affordable prices. YouHodler has low exchange fees and easy on-ramps for USD, EUR, CHF and GBP. Simply create an account and start buying crypto today. Don't forget to put this valuable DCA lesson into practice!

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The YouHodler Team is the collective mind of the platform. It's a hive of creativity and diversity in the form of one singular blog author. We are united as one.

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