When you decide to buy into any investment, including cryptocurrency, you have two basic choices that can inform your entire approach to investing. One is to buy large amounts of stock or crypto in single purchases.
The other is to take the same sum of money and divide it into smaller purchases over time. This strategy can be used for both traditional investing and crypto and when you buy small over time, you can employ a tactic called Dollar-Cost Averaging to make your buys more strategic and less susceptible to emotional investing and FOMO.
If you make a single purchase of stock or crypto, you buy in at whatever price is offered in that day’s trading. If you set aside five thousand dollars to make a single big purchase, the number of coins you can get that day is limited to the asking price.
What if you took the same five thousand dollars and invested in crypto over a one-year period? There would be times when the coin costs more, and times when it costs less. And what if you used smart contracts to buy and sell crypto within certain price ranges only?
Your potential for earning goes up because you aren’t buying all the coins at a single price for your $5k. You might choose to make regular crypto buys regardless of price, or you might set specific parameters to hit your desired price points.
This is a strategy that can’t be formulated in a vacuum, meaning you will need to know which direction the market is headed to decide if DCA is right for you. Why? Because in a rising market this plan might not work to your satisfaction the way it might in a flat or falling market.
Why do people consider DCA for crypto? The inherent volatility of cryptocurrency is one variable to contend with, but there are others related to that volatility.
Consider FOMO and how emotional investing drives some to make hasty choices that they regret later on. DCA is a strategy that leaves the investing to the parameters you decide upon for buying crypto and leaves the emotions aside.
DCA is a strategy you can use to avoid giving into greed and fear. It is best to think of Dollar-Cost Averaging as a long-term strategy for investment rather than a tool you should use for short-term profit-taking.
But there are caveats. DCA may not work as well in a market that is changing too quickly–too much rising value might force you to reconsider your timing for future purchases, and too much falling value may have you re-evaluating plans to sell. Being able to liquidate your assets is just as important as buying them in the first place, and depending on your goals this is an aspect of crypto investing you’ll want to know as much as possible about before you actually need to use that information.
Dollar-Cost Averaging can also be used as a strategy to liquidate your crypto assets over time. You can set the same parameters as when you purchase; set specific dollar amounts to “trigger” the sale of your holdings, not all at once, and over an extended period of time.
Not all investors want to cash out slowly. When Bitcoin hit valuations above $60K in 2021, some investors likely cashed out completely for reasons of their own. But others may choose to use DCA to avoid mistiming or misreading the market.
There’s an elevated risk when you are betting that the market will move a certain direction. You can bet on the market or against it; with DCA you do neither of those and simply set the parameters you want and the time frame you’ll execute those trades in.
There are crypto traders who proceed like traditional investors. They research the players, watch moving averages, compare all-time highs and lows, and read whitepapers for new projects. But not everyone has time to do this, some need a way to invest that does not require a tremendous amount of research.
DCA is a way to do that in a controlled manner, minimizing some of the risks of investing in crypto by removing the emotional element from the process. It also rewards long-term investing strategies which some crypto newcomers may be more familiar with, and therefore potentially more comfortable trying out with virtual currency.
DCA can protect against some short-term volatility, and it’s a good option to research if you aren’t sure how to get started and want to minimize some of the risk. You could be using DCA principles already and not even know it; if you have a 401(k) some of these concepts are at work in those investments.
Have you considered adding crypto to a 401(k) portfolio? Some investment houses permit this within certain parameters; you may be able to set up a retirement fund supplemented by coin purchases you make using DCA principles as your guide.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.