What is dollar-cost averaging?

Image with red and green candles representing high volatility of crypto market, and the timing of dollar-cost-averaging as an strategy to minimise risk.

Dollar-cost averaging (DCA) is a strategy for investing a pre-determined sum of money in small increments over time, as opposed to investing it all at once. DCA allows smart investors to take advantage of market downturns while effectively avoiding the risk of entering into a position with too much capital all at once. This strategy is especially useful in the crypto markets, which are as notorious for their volatility as they are famous for their future growth potential.

Dollar-cost averaging is especially recommended for those investors that do not have the time to regularly observe the price action of crypto assets but still wish to get exposure to the crypto markets. It can be thought of as a useful tool for investing slowly and consistently, while protecting investors from the emotional decisions of “going all in” or to “getting completely out” of the market in times of extreme volatility. At the end of the day, DCA makes investing more practical and less emotional. Few other investment strategies can claim this as their main benefit.

Making DCA work for you

Quite simply, the first step is to determine the total amount you wish to invest in your chosen crypto asset. Then, instead of investing that amount of money as a lump sum, you simply buy small quantities at regular intervals. Whatever the price is doing as you are buying your regular monthly/weekly instalment, you have to just proceed with the purchase with zero emotion. On some exchange platforms you can even set the purchases to happen automatically regardless of the asset price, effectively removing any kind of emotion-based indecision from the transaction. 

Fully committing to the DCA investment strategy means that, at times, you’ll be investing when the market has significantly dropped (or risen!) in value. Some investors might be reluctant to purchase crypto assets on a day when the chart looks extremely red. Statistically, however, these are the exact buying opportunities that DCA allows you to take advantage of. “Buying the blood” in crypto markets will often present you with the greatest opportunity, especially in the long run. 

Drawbacks of DCA

A possible downside of DCA is missing out on potential large gains because you could have invested the whole amount at once during a Black Swan event or when the market has found a bottom. This, however, requires that you time the market correctly, something even professional investors have a hard time doing. This is exactly what makes DCA the safer way to take advantage of significant market dips. With dollar-cost averaging you’re still “buying the blood”, but with zero emotion. The way investing should be done.

There is another downside of DCA, namely “buying the top” of an asset after its recent rapid rise in price. Sure, this could feel unpleasant, but one has to keep in mind that experience has shown time and time again that consistently buying any kind of asset at any price point tends to lower investor risk in the long run.

The bottom line

Dollar-cost averaging is usually seen as a lower risk/lower reward strategy to gain exposure to a particular asset over time. But when the asset in question is crypto, the potential for much higher long-term rewards becomes quite tangible. DCA diminishes the fear that more traditionally minded investors have over crypto assets’ notorious volatility and possible bear market scenarios. Why? Because DCA practitioners view every unexpected downturn in price as yet another opportunity to buy more of the asset they believe in at a discount. The main benefit of never going all-in on an asset is to always have cash on the side, ready to be deployed at lower price levels. Taking advantage of lower prices is how DCA investing can significantly lower the average entry price on a volatile asset such as crypto. For these reasons, dollar-cost averaging deserves its rightful place among the best investment strategies that non-professional crypto investors can deploy relatively stress-free.