Dollar Cost Averaging crypto is a tried and true method for investors to help reduce the risk involved with volatile assets like Bitcoin. It’s also a strategy that aligns well with peoples day to day lives and helps provide both novice and passive investors with a way to automate some or even all of their investing. It also has downsides that you should be aware of too.
What Is Dollar Cost Averaging Crypto?
Dollar Cost Averaging (DCA) crypto is the practice of investing in an asset like Bitcoin over time, usually with regular smaller amounts, rather than all at once with a single larger amount. For example, if you had $1,000 to invest you might buy $100 each week for 10 weeks rather than buying $1,000 of the same investment all at once.
Dollar cost averaging has the same meaning in crypto as it has with other investments (stocks, bonds etc) and has been a very common strategy with many investors around the world for a long time.
Note: The cost basis of your investment is how much you paid for that asset at the time. For example, if you paid $10,000 for 1 BTC, then your cost basis is $10,000. If you then paid $15,000 for another 1 BTC, your cost basis would increase to $12,500 as it’s averaged out over your multiple investments.
DCA Vs Lump Sum Crypto Investing
If you make a single, large investment all at once it’s usually referred to as a lump sum investment. This can be common when people suddenly acquire a large amount of money, for example through inheritance, a tax windfall or bonuses.
Making a single, large investment can often save you a lot in fees or transactions costs. For example, you would only have to pay for one Bitcoin Transaction Fee rather than multiple ones each week or month. You might also get a better trading fee rate as you’re purchasing a larger amount.
How To Dollar Cost Average Crypto
The most common way people dollar cost averaging into Bitcoin is by simply buying a certain amount each time they get paid. If this is something you’re considering doing, there are some key points you’ll want to decide on before you start such as:
- Frequency: Will you be investing every day, week, fortnight or month?
- Amount: How much will you be investing each time? Will the amount change?
- Exchange: Which exchange will you be using to make these purchases?
- Storage: Where will be you be storing the purchased bitcoins?
Dollar-cost averaging works by making sure you buy less of the investment when the price is high and more of the investment when the price is low. While many people get upset when the price of an asset goes down, if you have a long term view it can be seen as the asset being “on sale” and thus, a good thing.
Pros & Cons of Dollar Cost Averaging Crypto
- Can lower the average cost you spend on the investment (depending on timing)
- Lowers the risk associated with purchasing volatile assets like Bitcoin
- Stops you from trying to “time the market” which can promote reckless investing habits
- Encourages less emotional investment decisions and helps reinforce better investing habits
- Works well for those who earn a consistent salary and wish to invest regularly long term
- Can be fully automated to help you reach your investing goals whilst not being complicated
- You don’t need to have all the capital available to your immediately
- Can increase the average cost you spend on the investment (depending on timing)
- Increases the number of transaction costs and trading fees you need to pay
- If the asset price rises sharply (and permanently) after you start, it can cost you dearly
- Keeping track of the multiple purchases, their profits and taxes is more difficult
Dollar Cost Averaging Crypto Example
There are generally two situations people find themselves in when they consider a Bitcoin dollar cost averaging strategy. They want to start investing on a regular basis with whatever they make from their job. Or. They have received a large amount of money and they want to invest it.
Salary Employee Example
A simple plan for someone who gets paid monthly and wants to invest (as an example) $5,000 a year could be to buy $400 each time they’re paid and then send the bitcoins to their self custody Hardware Wallet for safe storage. This would result in 12 purchases of $400 each, which adds up to $4,800 a year (12 x $400). You could choose a higher or lower amount.
While there’s a whole host of crypto dollar cost averaging calculators out there, your plan doesn’t have to be complicated. Simply decide how much you wish to invest each year and then divide the amount by how often you wish to invest. In the above case $5,000 / 12 months = $417 so we just rounded down to $400 to make things easy.
Congratulations! You inherited $10,000 and want to invest it long term! After looking at various exchanges and fee rates, you decide to dollar cost average out the investment over 5 months. This is so you don’t have to pay too much on transaction fees but still get the benefits of DCA.
Dividing the $10,000 by 5 means you’ll need to invest $2,000 each month and then send the bitcoins to your self custody Hardware Wallet for safe storage.
What’s The Best Crypto Exchange For Dollar Cost Averaging?
As the nature of DCA is to make a large number of repeated purchases over time, you’ll want to focus on Crypto Exchanges that have very low trading and transaction fees. It’s also a good idea to ensure the process is as automatic as possible given you’ll be doing it regularly, potentially for a long time.
That being said, always ensure the exchange you choose is a no KYC one and defaults to storing the received bitcoins in a self custody or “private” Bitcoin Wallet. We have a full list of reviewed exchanges including all their fees and ratings below.
Is Dollar Cost Averaging Good For Crypto?
We at Athena Alpha believe DCA is good for crypto as it reinforces proper, long term investing behaviour rather than the short term, market timing behaviours that most major crypto exchanges encourage. Having a large base of investors all using DCA also helps to make Bitcoin less volatile.
How Often Should You Invest With DCA?
The frequency of investments is entirely up to you. Some people buy every day, some every pay day and others every few months after saving up a slightly larger amount. Do keep in mind that the more frequently you buy, the more transaction fees you will be paying.
What Is The Best Day To DCA Crypto?
The best time to buy any asset is when it’s the cheapest as this means you get more of it. According to multiple exhaustive studies made over the past few years, a general trend of either Sunday or Monday has emerged as the best day of the week to buy Bitcoin.
How Do You Calculate Your DCA Amount?
Divide the total amount you wish to invest by the number of investments you plan on making. For example, if you want to invest $1,000 over 10 weeks you would do $1,000 / 10 = $100 each week.