Dollar cost averaging – everyone is talking about it, but why is it so important to understand? And how can you make dollar cost averaging part of your crypto investment strategy?
“If only you invested in Bitcoin in 2011, you’d be a millionaire by now.”
We’ve all read that on almost every crypto website. And if you’re wondering why that didn’t happen to you, dollar-cost averaging could be the answer you’re looking for. Not just for Bitcoin, but any coin with 10X potential.
And while this term sounds complex, it has nothing to do with technical trading or holding. It’s a simple investment strategy you can apply immediately.
Dollar cost averaging (DCA), is the most recommended strategy for beginners because it is a systematic, progressive, and passive investment strategy. It means:
- You buy regardless of market conditions.
- You buy a smaller amount every few days.
- You buy based on long-term price potential.
If Bitcoin moves from 50K to 30K, you buy. If you invested $500 last week, you’ll also invest $500 this week. If you dollar-cost average, you don’t need to watch the market to invest. It can also be automated, while the opposite (active trading) can’t be.
Dollar Cost Averaging: Examples
If you DCA $50/week in 2021, you would have made +270% on Bitcoin, +748% on Ethereum, +1985% on Binance Coin, +1,033% on Cardano, +413% on Ripple, and +14,624% on Dogecoin.
Every time you invest with this strategy, your dollar cost is the same. But the token price always changes. If you spend the same amount on every trade, how many coins do you get on average? If you divide the total dollar cost by the total tokens, you get the dollar-cost average.
Once you know the average, it becomes more clear when you should sell or keep buying. Here’s what it looks like:
Suppose you have $8,000. You want to buy Cardano at $2 and sell it in four months. You could buy all at once, but what if you instead invest $2,000 per month?
- Month 1: Buy 1000 ADA at $2
- Month 2: Buy 500 ADA at $4
- Month 3: Buy 250 ADA at $8
- Month 4: Buy 200 ADA at $10
By Month 5, you got 1,950 ADA for $8,000. If 8,000/19,50 is 4.10, it means you bought $8,000 of Cardano at an average price of $4.10. Not as good as $2, but at least you didn’t sell early. If ADA falls from $10 to $5, you can still buy because it’s above 4.10. Meanwhile, those who invested a lump sum could be panic-selling. If the price is way above your average, consider taking profits. And $8K turned into $19.5K (+244%). $40K if you invested a lump sum.
But what if Cardano does terribly?
- Month 1: Buy 1,000 ADA at $2
- Month 2: Buy 1,333 ADA at $1.50
- Month 3: Buy 2,000 ADA at $1
- Month 4: Buy 4,000 ADA at $0.50
By Month 5, you get 8,333 ADA for $8,000. So you bought at $1.04 on average. That’s a loss of over 50%. Less than if you held till the bottom. If you believe the price will recover above your $1.04 average, it’s safe to keep buying. Here, $8K turned into $3.5K (-56%). $2K if you invested a lump sum.
Now let’s look at a scenario where Cardano falls by 50%, but then recovers and doubles:
- Month 1: Buy 1,000 ADA at $2
- Month 2: Buy 2,000 ADA at $1
- Month 3: Buy 1,000 ADA at $2
- Month 4: Buy 500 ADA at $4
By Month 5, you get 4,500 ADA for $8,000. That’s like buying $8,000 of ADA at $1.78. And because your profits are above 200%, you can sell. In this case, $8K turned into 18K (+225%), and $16K if you invested a lump sum.
Dollar Cost Averaging: Pros and Cons
The crypto markets often deceive beginners with volatility. And by dollar cost averaging, you’re reducing all those risks:
- You sell earlier rather than too late. If the price keeps going up, it also means you buy higher every time. You’ll then want to stop buying and take profits. So you don’t lose on downtrends as holders do.
- You never miss out on opportunities, because (1) you bought early and (2) you don’t need much money to get started. So you get more use from your money than if you locked it from day one.
- You’ll pick your coins more carefully. If you have to buy every week no matter what, of course you want that coin to be the best choice. And if you don’t see yourself buying it later for more than it’s worth today, it’s probably not that great.
- You buy lower more often than not. Because you never go all in, you always have extra cash to buy when it’s low.
- You can make money worry-free without much skill. You don’t need to check coin prices every morning, you don’t need to predict anything, and you don’t need technical trading. Once you know what to buy, you can set a recurrent order and forget about it. You don’t need to think your entry, only your exit strategy.
That doesn’t mean DCA has the best risk-reward. When prices go down, you lose money like everyone else (but less). And when they go up, active traders make the most money.
- You can’t buy at the bottom if you keep buying all the way up. DCA investors can’t buy the lowest nor sell the highest.
- Long-term investing is still unpredictable. Maybe you want to buy Bitcoin today and exit two years later at 2X. What if instead, it takes five years to get there? Even if it doubles next month, you’ll be buying high for the rest of the year.
- You make less money on a bull market, which is dangerous. If it takes you too long to hit your targets, the trend may revert before you take profits. And if it doesn’t go down, there’s a huge opportunity cost (remember Case 1?).
When Should I Start?
When you don’t know where to start, it’s hard to go wrong with DCA. Now that you know the downsides, you can plan for them to increase profits:
- Find the lowest time to buy every time (e.g., December 17th at 3 PM on a Sunday)
- You can be more flexible after you buy enough times. E.g., Buying 50% more on a 50% dip or selling 10% on a 200% spike.
- Once you’ve decided to sell after six months, don’t stress out when your portfolio is down 50% next week.
The best investment strategy is the one you can follow consistently. It’s why it’s always a good time to start dollar cost averaging.
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