At the time of writing, the cryptocurrency trading volume for 2024 sits at about $107.81 trillion (according to CoinCodex).
Cryptocurrencies are constantly becoming more popular, and people are entering the space every day. However, most people don’t know where to begin or what approach to take.
Understanding effective investing strategies is crucial. One that’s known for typically being quite reliable is dollar-cost averaging (DCA).
So what does DCA mean in crypto? Let’s get into it.
Dollar-cost Averaging Explained
Dollar-cost averaging is an investing strategy that people have been using for decades for a range of asset types. It involves making investments at a set price and set intervals.
For example, someone might buy $50 worth of a specific asset once a week. This will usually be done on the same day and time each week.
The result is that after a given time (such as a year), you will have invested in that asset at the average price for that year. This is done instead of buying a large amount at a set time.
The idea is that the value of the asset will gradually increase, but by investing in it at the average you reduce your risk of buying a large amount when the price is high and potentially losing quite a bit of money.
What Does DCA Mean in Crypto?
Many investors apply this approach to crypto. So, with the example above, someone might buy $50 worth of Bitcoin every Monday at 10:00 am. Crypto prices are volatile, so this is a good way to protect from that volatility and ensure you invest at a good average for the year.
For a lot of investors, this is a far more suitable approach for crypto than for other asset classes. The prices of cryptocurrencies can be very difficult to predict which makes trying to time the market almost impossible. While this may not always help someone make the largest gains, it can dramatically reduce the chances of making losses.
How to Use the Dollar-cost Averaging Method
There are plenty of crypto platforms available that you can use. Some of the most popular include:
- Coinbase
- Kraken
- Binance
- Bitfinex
- Gemini
Each platform has different benefits and drawbacks, so it’s worth looking into your various options to find one that works for you. They allow you to buy crypto in various ways, and if you want to use dollar-cost averaging, you can set up recurring purchases.
You can pick a specific amount you want to spend on each purchase, along with the frequency of purchases and the set time/day. For example, you might want to set it at $100 on Wednesday, 12:00 pm every two weeks. You can then essentially forget about it.
The platform will automatically make this purchase for you continuously using your chosen payment method. You can leave this to go on, then just cancel it if you decide you want to stop making the purchases.
When setting this up, you’ll also need to decide which crypto to invest in. Many investors go for a large market-cap coin like Bitcoin or Ethereum, but you’ll find plenty of other choices on any exchange.
What Crypto Should You Investin In?
This is where things really start to become tricky. It’s essential that you do your own research before investing in any crypto assets to make sure you know what you’re investing in.
Even with popular coins like Bitcoin, there’s a high level of risk involved. You should only invest in it if you’re prepared to take on that risk. When you start looking at smaller-cap coins, that risk increases.
The nature of dollar-cost averaging means that it’s almost always used as a long-term approach to investing. As such, the investors that use it typically have long-term belief in whatever they’re investing in.
It’s generally best to look into assets that don’t rely on short-term price volatility. These are more suitable for strategies like day trading. Instead, you want to go for cryptos that you think will gain value over a longer period.
Research different crypto assets, and try to find ones that you think will have long-term success. You can gather information from things like:
- Project whitepapers
- Information on project teams
- Tokenomics
- Social media accounts
You can also look at current market trends as these can help give you an idea of what to expect in the future. Look at a coin’s:
- Historical performance
- Trading volume
- Liquidity
Even online forums can be helpful as you can get an idea of what other investors think about certain coins.
It’s important to note that there’s no “right” choice here. The best coin to invest in may be different for different people. This is why it’s so vital to research things properly and see what aligns with your goals.
How Often Should You Invest?
Similar to your choice of crypto, this is something that you ultimately need to decide for yourself. Consider your current financial situation as well as how much you want to invest. Crypto exchanges are quite flexible, so you have several options.
Most investors who use dollar-cost averaging choose one of the following:
- Daily
- Weekly
- Bi-weekly
- Monthly
Note that the more frequent your purchases are, the closer your overall investment will be to the average. With that in mind, crypto exchanges have fees for purchases, so you may want to reduce your frequency so you’re not spending so much on these.
How Much Should You Invest?
As with many questions when it comes to crypto investing, it’s all down to you. While DCA is typically considered a safer strategy, investing in crypto always involves risk.
The most important thing to always bear in mind is that you should never invest any money you aren’t prepared to lose. While you could make significant profits, there’s always a chance you’ll lose your investment, so only use money that you can afford to lose.
For DCA, it’s generally a good idea to take a small portion of your weekly/monthly income and invest it. Make sure it’s a small enough amount that you’re not going to miss it. This way, you can keep buying more crypto and it won’t have a huge impact on your daily life.
Storing Your Crypto Securely
While you can use exchanges to easily purchase crypto, you may want to store it elsewhere. Crypto exchanges are typically considered unsafe for crypto storage due to the risk of hacks or even the collapse of exchanges. There are several digital wallets (also called soft wallets or hot wallets) you can use that work as browser extensions or mobile phone apps. Some of the most popular include:
- Phantom
- Metamask
- Guarda
- Trust Wallet
These are more secure than keeping your crypto on an exchange. However, the best level of security comes from hardware wallets (also called hard wallets or cold wallets). These are physical devices and will help ensure your crypto is as safe as it can be.
Some popular hard wallet brands to look out for are:
- Ledger
- Trezor
- Tangem
- Ellipal
- SafePal
Bear in mind that you’ll need to transfer your crypto to any other wallets manually. You could do this regularly to ensure you’re never holding too much on an exchange at one time. Additionally, you’ll want to make sure you’re using a wallet that supports whatever cryptocurrencies you’re investing in
DCA vs. Lump-sum Investing
When investing with a lump sum of cash, the value of your asset is pegged exclusively to the upward and downward movements of its price. Dollar-cost averaging helps you level out the price volatility over time. While it may not yield the same gains as a large investment during a dip, it helps ensure you invest at the average price over a given period, reducing potential losses.
Potential Drawbacks of DCA Crypto Investing
All of this may sound good, but no investment strategy is perfect. There are some drawbacks to dollar-cost averaging that you should be aware of.
Firstly, crypto exchanges have fees for every transaction, so when buying crypto often and in small amounts, these can add up. Make sure you understand the fees on different exchanges so you can manage this.
Additionally, the crypto market can move rapidly. If you have automatic purchases set up, you may end up buying smaller amounts of a coin due to sharp rises in the market. This has the opposite effect of the goal of DCA, so be cautious of this.
Is DCA Investing the Right Strategy for You?
You’re no longer asking “What does DCA mean in crypto?”, so you now just need to decide if it’s the right choice for you. It’s a popular approach due to its reliability. You just need to ensure you understand how it fits into your investment strategy and aligns with your goals before committing to it.
As we’ve already said, make sure you always understand your investments and only purchase crypto with money you can afford to lose. If you feel like you want to take a more active, fast-paced approach, check out our guide on crypto day trading.