The crypto market can be exciting at times. However, amid this excitement and a chance to make a profit from investing, the market can also be a bit chaotic. Prices can skyrocket within a few hours and crash half as quickly. This can be stressful to manage for many investors, as chasing dips is similar to attempting to catch a falling knife.
However, there might be a great (and even calmer) approach to managing risk in crypto investment. This approach is called dollar-cost averaging (also known as DCA), and many investors swear by it when it comes to playing the long game. Here’s how to avoid guesswork and navigate the market with discipline via DCA.
What Is Dollar-Cost Averaging?
Think of Dollar-cost averaging as an investment strategy where investors divide a total amount they intend to invest into smaller, equal parts. These parts are then invested into the market at regular intervals, regardless of its performance. Assume you want to invest $12,000 into the Bitcoin market over one year.
Instead of buying all at once, you can choose to invest $1,000 every month (whether Bitcoin’s price is up or down). You simply stick to the schedule and let the market’s fluctuations work in your favor over time. This approach reduces the need to monitor prices constantly. More importantly, it removes emotion from the equation. Instead of buying because of hype or panic, you’re following a set plan.
Why Trying to Time the Market Is A Bad Idea
Everyone dreams of buying Bitcoin at its absolute lowest and then selling again at its peak. From a more realistic perspective, very few people can pull this off, and even experienced traders can sometimes struggle. The crypto market reacts to everything, from global regulations to macroeconomics.
At times, the market can respond to something as small as a single tweet from a celebrity. Unless you have a crystal ball that shows you the future, trying to time the market is a great way to fall into a psychological trap. It becomes easy to buy during a hype-driven rally due to FOMO (or the fear of missing out) or sell in a panic crash. Emotional investing never ends well.
DCA, on the other hand, is all about remaining consistent. You don’t need to worry about whether “today is the day” or a reversal will happen tomorrow. Investing gradually is a great way to spread out the risk and come out smiling.
How DCA Works
Here’s a closer look at how dollar-cost averaging can play out in the real world, with real numbers. Assume you want to invest $4,000 in Ethereum over four months.
As a first option, you might choose to invest the full $4,000 when Ethereum is priced at $2,000. You receive 2 ETH for this and might smile if the price jumps to $3,000 over the next 4 months. However, you would have taken a $4,000 loss if Ethereum drops to $1,800 by Month 4. Your investment will now be worth $3,600, and cutting your losses will start to look very attractive.
On the other hand, you can choose the DCA path and invest $1,000 every month. In the first month, you get 0.5 ETH for $1,000 at a per-coin price of $2,000. If the second month sees Ethereum at $2,500, you can get in again with $1,000 for 0.4 ETH.
By the third month, Ethereum might have dropped down to $1,500, and a $1,000 investment would fetch 0.67 ETH. By the fourth month, an Ethereum price of $1,800 would fetch 0.56 ETH for $1,000. At the end of this investment period, you will have accumulated a total of 2.13 ETH. Its value by the fourth month would be $3,834, which is less than your initial $4,000 investment because of the market dip. However, this amount is more manageable than a $3,600 portfolio via the direct approach.
Even though the price of Ethereum crashed over the four-month timeframe, DCA investment allowed you to accumulate more ETH at lower prices. In a scenario where Ethereum recovers, DCA is bound to result in better returns than direct investment.
Top Benefits of Dollar-Cost Averaging
There are several benefits of choosing the DCA approach to investment, and some of them include:
1. Reducing Timing Risk
Markets tend to fluctuate every day, and direct investments (right before a dip) can result in immediate losses. DCA spreads out your entry points and helps to reduce the effect of the market’s volatility. Over time, the cost of the purchases even out, and your portfolio ends up more balanced.
2. Prevents Emotional Investing
Automating your investment plan this way removes the pressure to make emotional decisions. You won’t feel the need to chase the next green candle or sell after every red one. This kind of discipline is important for long-term investment.
3. Offers Peace of Mind
In any scenario, throwing a large sum of money into any market can be very risky, crypto or not. DCA allows you to commit smaller amounts and make the process less intimidating. It is also easier on your budget and reduces the risk of getting emotional when the market starts to swing.
4. Encourages Long-Term Thinking
DCA works best when you zoom out and think in years, not weeks. The entire strategy is designed for the most patient investors, who believe in their chosen projects for the long-term.
5. Simplifies the Process
DCA removes the need to watch the market every second or analyze complicated charts. Once a DCA strategy has been set up, it practically runs on autopilot. Many exchanges even offer recurring buy options to their users to make DCA buying much easier.
Setting Up Your DCA Strategy
If DCA sounds like something you’d like to try, here’s how to set up a DCA plan that fits your financial situation.
1: Decide How Much You Want to Invest
Start by having a clear idea of how much you would like to put into the market. This could be a lump sum you have at the ready or a part of your income every month. You can choose to invest $100 per week, for example, or $400 per month.
2: Choose Your Investment Interval
Pick a schedule that works for you, whether weekly or monthly. The key to getting this done is consistency, and you shouldn’t change your strategy for any reason based on market noise.
Step 3: Select Your Cryptocurrency
Choose an asset you would like to stick to based on proper research and risk tolerance. You can choose to DCA into Bitcoin or Ethereum. Oftentimes, investors even choose to diversify across different coins to spread the risk out even further.
Step 4: Automate Your Buys
If your crytpo exchange offers DCA services, you can set up automated recurring purchases. This makes sure that you stick to your plans and avoid the temptation of timing the market.
Step 5: Stay Committed
The hardest part of DCA isn’t putting money in. It’s sticking to the plan despite market noise when prices start to swing wildly. Trust the process and remember that DCA works best when you maintain conviction over the long term.
Remember that the crypto industry is known for being heavy with hype and panic. DCA stands out as the strategy most rooted in patience. Whether you’re new to crypto or just looking for a way to grow your portfolio, DCA could be just the approach you need.
