Dollar-cost averaging: A complete guide to DCA crypto

Dollar-cost averaging (DCA) is a strategy that 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.

According to our DCA survey, dollar-cost averaging was the top investment strategy among crypto investors, with 59.13% of respondents identifying it as their primary strategy.

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. 

Learn more about dollar-cost averaging, the pros and cons of the strategy as well as how to DCA crypto.

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.

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 example, an investor may choose to set up a recurring buy $10 of Bitcoin every week or $50 of Ethereum every month.

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.

Looking for a step-by-step guide on how to DCA crypto?

This outline can be a good place to start.

Before dollar-cost averaging into any cryptocurrency, investors should do their own research.

Our page can help you learn about different , but be sure to review a range of sources.

Since DCA is a long-term investment strategy, it is most often used by investors who have a long-term belief in the future of a cryptocurrency, rather than those looking to speculate on short-term price volatility.

Here are some things to consider when choosing a cryptocurrency to DCA:

• Examine the longevity of the digital asset. Since the goal of DCA is to consistently accumulate and asset over several months or years, the digital assets should demonstrate longevity in the market. 
• Research the fundamentals of the cryptocurrency. This might include reading the project's white papers, information related to the project's team, its social media channels as well as the cryptocurrency tokenomics. 

• Evaluate the prevailing market trends. Consider trends and the sentiment surrounding the cryptocurrency before starting to DCA into it. 
• Consider metrics such as trading volume, liquidity and historical price performance. 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 differ for everyone, all investors would benefit from developing a deeper understanding of the asset and its potential risks.

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

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. 

Here are some things to consider when choosing how much to invest in cryptocurrency.

• Potential risk and volatility of the asset: This will help you identify the amount of money you’re comfortable parting with on a regular basis.
• Account for essential expenses: Bills, rent/mortgage, groceries and savings can dictate how much capital a person has to invest. You can use your monthly costs to determine a reasonable amount to allocate toward cryptocurrency investing without compromising your financial needs.
• Set a limit:  Some traders may consider investing no more than 10% of their savings in crypto in order to help them manage risk.

There is no "right" time to DCA into crypto. The timing of an investor's purchases depends on 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 is best.

There is no definitive answer as to how long to use dollar-cost averaging when investing in cryptocurrency.

Some industry commentators say 6-12 months is adequate, while others recommend time horizons of several 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.

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.

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 to DCA
2. How often to invest
3. How much to invest at each interval
4. What specific time or day to make each trade

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.

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

Investors from our DCA survey also said reducing the impact of market volatility was the top benefit of DCA strategies (46.13%), followed by consistent investments (23.95%).

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.

Emotional trading occurs when investors make decisions based on short-term market fluctuations or heightened 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. There’s less pressure to time the market or chase the latest investment trend. Instead, they can focus on the long-term accumulation of crypto assets.

Timing the market refers to the strategy of trying to predict the right moments to buy and sell investments with the goal of maximizing profits. 

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

• 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. 
• Timing the market 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.

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

Here are some factors that can be disadvantages of dollar-cost averaging.

Higher frequency dollar-cost averaging orders can incur more fees, especially when trading on centralized crypto exchanges, which can add up over time.

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.

Investors who solely commit to buying a single cryptocurrency (like Bitcoin) 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 dollar cost averaging.

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.