Dollar Cost Averaging
Investing in crypto can be tricky. The complexities of deciding what to invest in, when to double down, and when to hold cash are often amplified by crypto’s volatility.
To avoid banking on the “perfect” time to buy, beginners, seasoned investors, and even experts often use dollar cost averaging, a popular investment strategy.
What is dollar cost averaging?
Dollar cost averaging is an investment strategy in which an investor evenly splits their investment into periodic purchases regardless of the asset’s price.
Investing in smaller amounts over time means that you’ll buy both when the price is high and when the price is low.
In turn, this smooths out your average purchase price.
Dollar cost averaging is popular in crypto given how quickly prices go up and down in a short period of time due to volatility. The basic idea is that you spread your investment into equal amounts over regular intervals instead of trying to decide on the “perfect” time to buy.
Using dollar cost averaging in a bear market
In an article by Wealth Professional, Investment Advisor Graham Priest told Wealth Professional;
"I'm advising clients that dollar-cost averaging over the upcoming time period is one strategy to mitigate risk. Some clients have placed greater amounts in the past few weeks to take advantage of the drop in many stocks. But overall, dollar-cost averaging is prudent.”
While dollar cost averaging can be used in any market, such as in a bull market where prices are rising, and in a bear market where prices are falling, utilizing this strategy during a down market or recession can be particularly powerful.
Does dollar cost averaging really work?
While you should avoid making investment decisions based on what others are doing, many legendary investors embrace a dollar cost averaging approach instead of timing the market.
Warren Buffett believes you should only buy stocks if you have no problem holding onto them for 10 years and buys companies because of their fundamentals and long- term possibilities.
This approach can be applied across a range of assets, including crypto. Instead of swinging for the fences, strive to build your portfolio incrementally.
If you’re still not convinced, there are plenty of online dollar cost averaging calculators that let you test this strategy out for yourself.
The data below from dcaBTC shows the total value of investment when $10 Bitcoin is purchased weekly for three years, starting in 2019.
The price of bitcoin (orange line) vs the total accumulated amount invested (green line).
What are the disadvantages of using dollar cost averaging?
Adopting a dollar cost averaging approach to investment does not guarantee protection against losses or gains in profit. There are a few disadvantages to consider ahead of determining if this is the right investment strategy for you4
- Time. It can take a long time to build up a position if you’re investing small amounts regularly.
- “Mooning.” If the asset you’re investing in never goes down, you may have been better off just buying all at once.
Remember: Dollar cost averaging does not guarantee that you will make a profit, and as with all crypto investments, your capital is at risk.
How to get started with dollar cost averaging
- Choose an amount to regularly invest. It could be a flat amount, a percentage of your paycheck, or something else. It’s important to choose an amount you can sustain and remember, only invest what you can afford to lose and what you do not need access to in the short term.
- Choose assets. You can choose one or more assets to build a position in.
- Choose a purchase interval. It can be every week, every month, or even everyday.
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