Dollar-cost averaging (DCA) is one of many tools crypto investors have borrowed from the world of conventional investing and, in fact, is ideally suited for the job.
(I should mention here that crypto exchanges often refer to their DCA option as a “recurring buy.” The terms are interchangeable.)
You’re likely already familiar with DCA – you’ll often hear Chief Crypto Strategist Nick Black talk about it on American Institute for Crypto Investors LIVE as part of his crypto investing strategy…
It’s one of the nine core steps he recommends before making an investment.
But how exactly can you use dollar-cost averaging to your advantage in crypto investing? That’s what I’m here to break down for you.
We want to help you make more money than you know what to do with, and dollar-cost averaging is an essential part of that.
So today, I’m going to go back to basics to show you what DCA is, why anyone would want to do it, and how you can apply it to your own crypto investing strategy…
What Is Dollar-Cost Averaging?
The most basic definition of dollar-cost averaging is buying a specific amount of a particular investment at regular intervals. Usually this buying is automated, with the investor setting up the parameters at their brokerage or exchange.
You may be using dollar-cost averaging without realizing it if you have a 401(k) plan. Every pay period, the money you’ve allocated to your plan is used to purchase shares in the funds you’ve chosen.
The mechanics of how DCA works – and why it is such a commonly used investing tool – is easier to understand with an example.
Let’s say Sue became interested in Bitcoin (BTC) at the end of 2020 as the rally took BTC well past its previous all-time high. So she decides to use DCA to auto-buy $100 worth of Bitcoin on the first day of each month.
This chart (to the right) shows what that investment would look like. Note that when the price of Bitcoin is lower, Sue’s $100 buys more, and when the BTC price is higher, she buys less.
It’s that simple.
Now, here’s why it’s so popular…
Why Use Dollar-Cost Averaging?
People use dollar-cost averaging to build a long-term position over time.
The key advantage to DCA is that it removes emotion from the calculus of when to invest and how much to invest. Getting caught up in market momentum often leads investors to make bad decisions out of greed or fear. So by avoiding that, DCA helps curb risk.
Dollar-cost averaging is a “set-it-and-forget-it” approach. It eliminates the second-guessing and overthinking that often haunt investors.
DCA is also a good way to cope with volatility. Whipsawing prices make it harder for investors to decide when to buy and sell.
That’s why DCA is a particularly effective strategy for investing in cryptocurrencies. And as anyone who has spent any time watching crypto prices knows, no investment class is as volatile as crypto.
But you should be aware of a few possible drawbacks…
Disadvantages of Dollar-Cost Averaging
Probably the biggest disadvantage to DCA, particularly when used to buy crypto, are the fees incurred with each purchase as opposed to buying a larger amount of crypto all at once. Still, since you’re using DCA to build a long-term position in an asset you expect to appreciate, your future gains should far outweigh those fees.
Another risk is the possibility of missing out on a big gain had you invested a lump sum in the asset while the market was plunging. Or that some of your buys occur at the top of the market, which means those lots will be in the red when prices fall.
But those scenarios only represent a significant risk if you’re an expert at market timing -which, by the way, no one is.
In nearly all cases, the benefits of using DCA far outweigh the risks.
How to Use DCA in Crypto
While dollar cost averaging is the default in a 401(k), it’s not always easy to find or set up in a personal investment account.
But if you want to use DCA in crypto, you don’t have to look very hard. The majority of places where you can buy cryptocurrencies offer a dollar-cost averaging feature.
As expected, the most straightforward DCA feature is available on Coinbase (COIN). Every time you try to buy a cryptocurrency, Coinbase will ask if you want to make it a recurring buy. While I appreciate the easy access to DCA, it’s almost too intrusive.
Of course, Coinbase also tends to have the highest fees. And in the case of DCA, the ease of use isn’t that much greater that those fees are worth it.
In fact, most of the crypto sites and apps I checked make their DCA feature almost as easy to find and to use.
Other major crypto exchanges that offer DCA include:
- Gemini (GUSD)
- Crypto.com (CRO)
- KuCoin (KCS) (via its trading bot feature)
- FintruX Network (FTX) (via its mobile app)
- Binance.US (BNB)
Not all exchanges offer DCA. Those that do not (at least not yet) include:
- Kraken (KRAKENSQUID) (although DCA is said to be in the pipeline there)
- Bittrex (SPY)
- Bitfinex (BTCDOM)
One Bitcoin-only site, Swan Bitcoin, has made recurring buys the centerpiece of its business. However, the only crypto it offers is Bitcoin. If you’re wondering why investors would pick Swan Bitcoin over one of the many other platforms, it’s because their fee is 80% lower than Coinbase. So when you’re investing on a large scale, that makes a big difference.
In addition, a number of apps and services that offer crypto also have an option for dollar-cost averaging. They include:
- Voyager (VGX)
- Cash App (Bitcoin only)
- Robinhood (HOOD) (except for Hawaii and Nevada)
- Strike (Bitcoin only)
While PayPal (PYPL) allows its customers to buy several cryptocurrencies, it does not yet have a DCA feature.
As for which one is “best,” well, there’s not much difference; DCA is a pretty straightforward feature. I’d say if you have an account with a site or app that offers DCA, just use that one.
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Advisory Board Member, American Institute for Crypto Investors