Dollar-cost averaging: A complete guide

Dollar cost averaging is an investment strategy where an individual purchases a fixed amount of an asset such as a cryptocurrency at regular intervals over a period of time.

The key principle of dollar-cost averaging (DCA) is that by making consistent smaller purchases, investors may be able to buy more of an asset if prices fall and less of an asset if prices rise.

This helps to "average out the cost" of the acquired asset over time.

It also helps to reduce the significance of "timing the market" as investors are able to consistently accumulate an asset over time rather than acquiring a large lump sum at once.

The DCA method is considered an alternative to lump-sum investing where a person invests all of their money in a single transaction.

With crypto dollar-cost averaging, an investor splits their investing capital into smaller increments and makes several purchases at multiple different prices over an extended period. 

For some traders, dollar-cost averaging’s focus on time in the market may be a more suitable option than timing the market with a lump-sum investment.

By following a disciplined DCA strategy, investors have an opportunity to steadily build their crypto holdings over time with a more passive investing approach.

One of the main benefits of using the dollar-cost averaging method is its relative simplicity when compared to other trading strategies.

When using this system, prospective investors do not need to think about:

• Manually placing each trade order.

• Using multiple indicators to conduct technical analysis.

• Staying up all night watching candlestick charts.

Instead, they only need to decide:

1. Which cryptocurrency do they want to DCA?

2. How often do they want to invest?

3. How much do they want to invest at each interval?

4. What specific time or day to make each trade?

The aim is that by making regular investments over an extended period of time, the overall cost basis (the purchased price of an asset) may be lower than if the trader had invested all their capital at once.

Let's explore these steps in more detail.

Which cryptocurrency should I DCA? 📆

Before dollar-cost averaging into any cryptocurrency, should conduct their own due diligence. Our crypto guides page can help, but be sure to review a range of sources.

Dollar-cost averaging is generally regarded as a long-term investment strategy. 

Because of that, it is most often used by investors who have a long-term belief in the future of a cryptocurrency, not those looking to speculate on short-term price volatility.

For traders looking to accumulate consistent amounts over several months or years, they should feel confident that the digital asset they're buying has longevity in the market. If a trader is simply looking to speculate on the short term price volatility of an asset, dollar-cost averaging may not be the most effective option.

Some traders may find it useful to begin by delving into the fundamentals of the cryptocurrency they're considering. This might include reading the project's white papers, information related to the project's team, its social media channels as well as the asset’s tokenomics.

You can learn more about the various economic design choices that can influence the price of an asset in our article, What is cryptocurrency tokenomics?

Additionally, a trader may want to evaluate the prevailing market trends and sentiment surrounding the cryptocurrency before starting to DCA into it. 

Metrics such as trading volume, liquidity, and historical price performance can be good places to start. Monitoring online forums and reputable news sources can also allow traders to gauge market sentiment and develop a thesis on the long term potential of an asset.

While the answer to which cryptocurrency should I DCA into may be different for everyone, all investors would benefit from developing a deeper understanding of the asset and the potential risks they face.

How often should I DCA into crypto? 🗓️

This is different for everyone and each person should carefully analyze their own situation before making this decision. 

In most cases, DCA investors opt to purchase crypto on a daily, weekly, bi-weekly, or monthly basis. But this is entirely up to each person. 

Some crypto investment platforms like Kraken allow customers to automate the DCA process using recurring buys, taking the stress out of manually placing trades at set times.

When setting up recurring buys, clients simply configure the time and frequency they wish to buy crypto and let the exchange platform automate the rest.

Does recurring buys sound like the right approach for you?

How much do I invest each time? 📊

When determining what amount to invest in cryptocurrency, it is crucial for investors to analyze their financial circumstances and goals. 

As they determine how much they want to purchase, it’s wise to consider things like a person’s monthly budget, as well as the potential risk and volatility of the asset. This will help in identifying what sum of money they're comfortable parting with on a regular basis.

It can be helpful to consider essential expenses, such as bills, rent/mortgage, groceries, and savings. In doing so, traders can determine a reasonable amount to allocate towards cryptocurrency investing without compromising their financial needs.

Cryptocurrency investing involves risk and markets can be highly volatile. Even when dollar-cost averaging, it's advisable that traders should never risk more capital that they are prepared to lose.  Some traders may consider investing no more than 10% of their savings in crypto in order to help them manage risk.

What time is best to DCA into crypto? ⏳

There is no "best" time to DCA into crypto. It depends on your individual preferences and goals.

For traders who want to find the optimal times to buy each day, week, or month, they might decide to research the historical price performance of an asset and see if there are certain times that yield marginally better results.

But, because the core premise of dollar-cost averaging is based on traders not needing to time the market, investors can stick with whatever particular timeframe they think think is best.

Some believe that using the dollar-cost averaging strategy to invest in cryptocurrency may help to:

• Smooth out volatility and minimize the impact of price fluctuations.

• Reduce emotions from the trading process.

• Avoid the impossible task of trying to buy at the “right” time.

Smooth out volatility 🧈 

The dollar-cost average strategy may help some traders to better navigate the unpredictable terrain of the crypto market by spreading investments over time.

While this can help to smooth out market volatility to some extent, it's crucial to understand that this strategy doesn't guarantee profitability.

Buying at regular intervals when crypto prices are falling means that investors are consistently purchasing at lower price points. Over time, this can result in a reduction in the average cost per unit of a cryptocurrency, potentially yielding greater returns in the long term.

However, this assumption is dependent on price rebounding to higher levels in the future.

Conversely, consistently buying into the market as prices rise will inflate the average price per unit compared to lump-sum investing. This can potentially lead to diminished returns, or even a loss if the trader converts their holdings back into cash when prices are below their average price.

Hence, while DCA offers a strategic approach to navigate market fluctuations, its success ultimately hinges on the trajectory of crypto prices.

Remove emotions from trading 🧘‍♂️

Emotional trading occurs when investors make decisions based on short-term market fluctuations or emotional reactions to news or events. 

This can lead to impulsive buying or selling decisions, often driven by two common emotions:

1. Fear of missing out (FOMO).

2. Fear, uncertainty, and doubt (FUD) .

These emotions can sometimes cloud judgment and lead to poor investment decisions.

By using the dollar-cost averaging strategy, investors can set their emotions aside as they commit to regular, predetermined investments, regardless of market highs or lows.

This approach helps manage FOMO or FUD because investors do not feel pressured to time the market or chase the latest investment trend. Instead, they can focus on the long-term accumulation of crypto assets.

No need to time the market ⏱️

Timing the market refers to the strategy of trying to predict the optimal moments to buy and sell investments in order to take advantage of price fluctuations and maximize profits. 

However, there are several reasons why timing the market may not be necessary or beneficial in the long run.

Firstly, market timing requires accurately predicting market movements, which is notoriously difficult even for professional investors. Numerous unpredictable factors, such as economic indicators, political events, and investor sentiment influence the crypto market. Trying to accurately predict these fluctuations is akin to attempting to navigate through a maze blindfolded.

Lastly, market timing can involve frequent buying and selling, which often leads to increased trading fees. These costs may eat into potential gains and erode any positive investment returns.

Dollar-cost averaging (DCA) and lump-sum investing are two different approaches to investing. Each method offers its own advantages and disadvantages.

DCA involves investing a fixed amount of money at regular intervals, regardless of current market conditions.

As we've already explored, this strategy can help in reducing the impact of market volatility, as traders are buying assets at different price points over time, but this does not guarantee profitability.

Lump-sum investing, on the other hand, involves a trader investing all their capital at once.

This approach can potentially yield higher returns if the market performs well, as the entire investment is exposed to the market's upward movements from the start. However, it can also result in greater losses if the market underperforms.

The choice between DCA and lump-sum investing generally depends on various factors, such as a person's investment horizon, risk tolerance, and available funds. 

It's important to consider all options carefully before making any investment decision.

While dollar-cost averaging cryptocurrencies can offer several benefits, it is not without its drawbacks.

• Additional costs: When employing dollar-cost averaging in cryptocurrency investing, it is important to consider the additional costs that can be associated with this strategy, especially when trading on centralized crypto exchanges. These additional costs mainly come in the form of trading fees. Higher frequency dollar-cost averaging orders can incur more fees, which can add up over time.

• Lower returns: Some industry proponents assert that using the DCA strategy can result in lower-than-expected returns when compared to other trading systems, particularly if a majority of these recurring buys are executed in a rising market.

• Reduced flexibility: Investors who solely commit to buying a single cryptocurrency over a long period of time, rather than trading between multiple assets, may miss out on other potentially profitable opportunities that might not be possible to capture through DCA’ing.

There is no definitive answer as to how long is best to dollar-cost average into cryptocurrency.

There are some industry commentators who say 6-12 months is best, while others recommend time horizons of 10-15 years.

It ultimately comes down to each person's subjective financial goals and how long they're prepared to invest in the cryptocurrency market. Market conditions also heavily influence the outcomes of any dollar-cost averaging strategy.

The DCA strategy can provide a hands-off investment solution for traders who primarily want to steadily grow their crypto holdings over time without having to actively manage trades or time the market.

While it doesn't necessarily guarantee increased profitability versus other strategies, the ability to "set it and forget it" may be appealing to some investors looking to accumulate crypto over the long term.

Dollar-cost averaging offers an easy way for people to constantly build their crypto portfolio.

Kraken allows clients to set up recurring buys on hundreds of different cryptocurrencies, so they can always accumulate coins regardless of the market’s conditions.

Start dollar cost averaging by setting up recurring buys with Kraken today.