You can see this immediately with https://www.beaxy.com/ and its Bitcoin strategy. Heading into its new dollar-cost averaging strategy, for example, El Salvador had purchased a total of 2,381 Bitcoins at an average price of $43,357. In a standard dollar-cost averaging strategy, you invest the same preset amount on a regular basis , regardless of market conditions.

• The exchange takes care of the rest, automatically buying on a recurring schedule you’ve selected.
• This is because investors are much more likely to sell their crypto holdings in panic during the next major bear run if they do not have profound convictions about their investments.
• By dollar-cost averaging, you’re letting statistics be your professional trader.
• Continue reading to know more about this strategy and how to use it effectively in your crypto investing strategy.

dollar cost averaging crypto’s purpose is to level out an investor’s average price they pay for an asset, their cost basis, over time. Since people who use DCA are constantly buying small positions in one investment, chances are they’ll pick up shares at different price points, thus evening out their cost basis. The term “dollar cost averaging” was coined because such a strategy opens the potential for reducing the average cost of the total amount of assets purchased. As a result, the investor could be buying less of an asset while the price is relatively high, and more units of that asset as the price goes lower. In other words, the investor would enter in a position gradually, instead of doing it on a single move.

Dollar-Cost Averaging in Crypto Markets: Pros and Cons

If you invest at a fixed time and the price corrects around that time, the average purchase price could be very low. Besides how much and how often you are going to invest, it’s also important to decide how you want to do this. By choosing a platform where you can invest automatically, you can effortlessly use the DCA method. This way, you can build up your crypto portfolio without looking back.

Understand the different wallet types and their respective pros ADA & cons.How do I send bitcoin? Sending bitcoin is as easy as choosing the amount to send and deciding where it goes.How do I receive bitcoin? To receive bitcoin, simply provide the sender with your Bitcoin address, which you can find in your Bitcoin wallet.What’s a ‘self-custodial’ wallet?

Traders turn to USDT as BUSD dominates heavily imbalanced Curve liquidity pool

It can be safer to start small as well, building slowly until you can study the effects of trading costs and develop a stronger sense of long-term opportunity. More frequent purchases limit volatility’s effect on your portfolio, reducing risk, but can also slow performance when trends are bullish. This volatility is primarily due to the nascency of the currency, and is expected to decline as the market matures. Despite the fact that you invest in a relatively safe way with dollar-cost averaging, you still have no guarantee of a positive return. That’s why you should always keep in mind that you can also lose your investment and never invest with money you can’t afford to lose.

For those who don’t mind actively managing the crypto market, they can manually DCA into cryptos when they notice favorable opportunities. Instead GMT of buying cryptos at pre-set intervals, some DCA investors may wait for a significant correction to invest more of their cash. Some people who use DCA increase their purchases during a bear market and ease up during bullish periods.

This is why Bitcoin or Ethererum are often chosen, as these cryptocurrencies are considered the most stable crypto projects. Theoretically, ‘buying the dip’ seems simple; yet, deciphering when an asset has actually hit the bottom of its price range is difficult, even for advanced traders. This form of trading is not exclusive to the crypto world and has been utilised for decades in traditional finance . Its main purpose is to skip the otherwise necessary step of timing the market in order to turn a profit; or, in other words, to offer an alternative to the lump-sum strategy. If you’re still not convinced, there are plenty of online dollar cost averaging calculators that let you test this strategy out for yourself.

Conversely, in an uptrend market, where shares are bullish, a scaled plan to sell is adopted. The volatility of a financial instrument is the risk of upward or downward movement, which is inherently present in financial markets. DCA minimizes volatility risk by attempting to lower the overall average cost of investing. DCA is likely more attractive to young investors who know their crypto holdings will increase in 10 or 20 years if they commit to this investing method.

Using the strategy ensures that you buy more securities than if you had purchased when prices were high. Apart from their pockets, the raging volatility in the crypto market and rapid declines have also been toying with investors’ emotions, some of which have lost a fortune in just several months. Toward the end of 2021, cryptocurrency traders were flying high as the market hit all-time highs driven by strong interest among retail and institutional investors.

The DCA strategy works well in conjunction with a forward-thinking approach. The longer the time horizon, the better this strategy will work. As long as the general direction of Bitcoin is up, time will take care of smoothing out the short-term losses. I’m not worried about the 40% drops in Bitcoin because this is ultimately an opportunity to get a better price. I can let my bot that automatically buys Bitcoin every day do all the work, while I get to enjoy my free time and make headway in my career stress-free.

Higher transaction fees

We found a very different pattern when looking at Bitcoin DCA performance, detailed in a later section. Put your crypto purchases on autopilot, but be mindful of exchange fees that create a sometimes-hidden headwind. Cost basis determines the original value of an asset, and is used to calculate capital gains and losses for tax purposes. Bitcoin is a unique asset that can meet the specific needs and goals of an investor who is looking for diversification, flexibility, and increased purchasing power in the long-term. At River we don’t charge fees beyond the initial setup of a recurring order, which makes DCA more affordable for any investor. For the DCA method, it is useful to choose a cryptocurrency that you expect to exist and increase in value in the future.

The ongoing crypto downturn shouldn’t be an issue as you’re betting on crypto’s long-term prospects. On the other hand, investing in crypto through DCA for older investors nearing retirement is probably not the best bet. The DCA strategy could be particularly beneficial for crypto investors who lack the experience and knowledge to identify the best moments to buy. Additionally, it’s also a proven method for long-term investors who do not want to check prices every couple of hours. An investor will usually set aside money they intend to dollar-cost average into a crypto and set a schedule to make small purchases. As it relates to our dollar-cost averaging strategy, looking at the above chart, when the blue line is close to or below the black line (200-day average), we can take it as a signal to buy more.