How To Use Dollar-Cost Averaging for Long-Term Crypto Investments

In the beginning, market analysts frequently stated that “safe investing” and “cryptocurrency” were two phrases that should never appear in the same sentence. However, since the meteoric rise of the Bitcoin era, cryptocurrencies have proven their potential as lucrative investment options.

While they are not without their risks, Bitcoin and other cryptocurrencies are more than the fad that analysts once considered them to be. Despite its ups and downs, Bitcoin continues to demonstrate a general upward trend that should reassure many investors.

dollar-cost averaging cryptocurrency

Safe investing is about knowing when and where to invest your money. Profiting from cryptocurrencies requires a calculated approach to protect against potential volatility in the market.

To set you on the right path toward making safer crypto investments, we will show you how to use dollar-cost averaging for long-term Bitcoin investments.

What Is Dollar-Cost Averaging?

Dollar-cost averaging (DCA) is an investment strategy that allows investors to buy assets incrementally over a period of time. Rather than invest a large sum of money all at once, DCA encourages small, fixed-amount purchases of a stock or asset to increase your holdings gradually. In principle, this strategy helps investors hedge against volatile movements in the market that can result in dramatic losses.

As a general strategy, investors employ the DCA approach when they believe an asset has the potential to appreciate over an extended period. Instead of cashing out during peak or market crashes, DCA investors take a long-term approach and look to profit from an asset that will steadily increase in value.

How Does Dollar-Cost Averaging Work with Crypto?

The same principles are at play when you use dollar-cost averaging with crypto. By investing small sums of money in crypto regularly, you can take advantage of downturns in the crypto market without risking your entire investment amount.

DCA gives you a flexible buffer of protection while also allowing you to profit from peaks in the market value of an asset. However, you will buy in during both high and low points in the market because you are purchasing the asset in intervals.

We’ll provide a real-world example of how this works with crypto. Let’s say John wants to invest $150,000 in Bitcoin in a year. John can:

  • Invest $2,884 every week for 52 weeks
  • Invest $5,769 biweekly for 26 weeks
  • Invest $12,500 every month for 12 months
  • Invest $37,500 every quarter for a year

As the example shows, using the dollar-cost averaging method for crypto is straightforward.

  1. Select a cryptocurrency in which you want to invest.
  2. Determine the total amount of money you want to invest.
  3. Set the length of your investment period and how often you wish to invest.
  4. No matter where the market stands, continue investing your money regularly.
  5. Wait for the period to end before considering whether or not to cash out.

Using this incremental approach, DCA averages your purchases over time, protecting your investments from extreme shifts in the crypto market.

In contrast, your ability to profit from one-time investments depends entirely on the price of your crypto asset at the time of its purchase.

Is Dollar-Cost Averaging Safe?

When learning to use dollar-cost averaging for long-term Bitcoin investments, it’s essential to do your due diligence and judge if DCA is a good strategy for you.

While dollar-cost averaging can be safer than an all-in investment, you should still proceed with caution when using this method with crypto. As with all investing strategies, it carries inherent risks that you should consider.

Crypto assets will not always yield a good return on your investment, although they have shown a steady increase in value. Many opinions are circulating about crypto investing online, so be sure to do your research.

If your research tells you that crypto is a worthwhile investment, the DCA method can be one of the safer investment strategies.

How Often Should You Invest in DCA?

Consistency is key if you want to use DCA effectively. Depending on your approach, you can choose to invest your money at different intervals throughout the year. Whether or not you decide to invest every week, every two weeks, every month, or every four months is up to you.

The DCA approach works by averaging your purchases over time, so investing small amounts of money with greater regularity can result in a better overall average than making several mid-sized purchases a couple of times a year.

However, whatever time scale you choose, be sure to stick with your plan.

Advantages and Disadvantages to DCA in Bitcoin

As with any investing strategy, dollar-cost averaging has its benefits and downsides. With investing in general, a lot boils down to market timing and the types of assets you plan to invest in. Although more traditional investing options may seem safer than purchasing crypto, cryptocurrency offers significant benefits that these more conventional options often lack.

However, before you employ the dollar-cost averaging method to invest in crypto, take time to grasp the full range of benefits and disadvantages that accompany this type of investing.

As we explain below, some of the con facets of DCA investments might also be pros. Deciding if DCA is right for you will depend on how much you value security over flexibility.

Advantages to DCA in Bitcoin

Here are a number of the more notable advantages investors found while using the dollar-cost averaging method with cryptocurrencies like Bitcoin.

Doesn’t Require Large Up-front Investments

Dollar-cost averaging offers you the flexibility to make many small purchases at regular intervals. By allowing you to stretch out your investment over time, DCA does not force you to commit large sums of money with your initial investment.

This option is ideal for those who are not entirely comfortable investing large sums of money in Bitcoin or other cryptocurrencies at once. If you are not in a position to invest a lot of money upfront, DCA allows you to pay as you go and build your assets over time.

Reduces the Risk of Purchasing Upward Spikes

Because dollar-cost averaging divides your initial investment into smaller increments, you avoid the risk of investing all of your money during a price spike. Regular purchases spread the risk over time and ensure protection from inflated prices.

While on a general uptrend, Bitcoin is known for dropping and rising dramatically over short periods–sometimes over days or weeks. The DCA approach hedges against these jumps allowing you to use its average growth rate to your advantage.

Offers Opportunities to Buy Bitcoins at Low Prices

Bitcoin’s volatility can work in your favor during drastic price drops. If you only had $52,000 set aside to invest in Bitcoin and invested it all on January 1st, when the price of Bitcoin is $18,000 per share, you would immediately purchase almost three shares of Bitcoin. This singular purchase would provide you no opportunity to buy at a potentially lower cost later.

However, developing a DCA strategy to invest in Bitcoin offers the opportunity to acquire more Bitcoin during price drops. If that same investor who had $52,000 at the start of the year put a DCA plan in place, they could invest $1,000 weekly. One week the price could drop to $5,000 a share, allowing their $1,000 to purchase one-fifth of a share in a single week.

While this may not seem like a lot, seeing these price drops throughout the year would yield more share ownership than purchasing outright. A DCA aims to stretch out your earnings and reap the benefits of waiting for price drops, allowing you to obtain more shares over time instead of purchasing all at once.

Provides Time to Understand the Market

Investors who purchased and held onto their Bitcoins for over three years saw favorable returns on their initial investments. When Bitcoin dropped early on, other investors were intimidated by the risks and quickly sold off their holdings not long after investing. An emotional response to fluctuations in price can make it hard to learn from the market.

It is important not to view Bitcoin and other cryptocurrencies as boom-or-bust schemes to make a quick buck. Dollar-cost averaging strategies encourage long-term investment by establishing an investment timeline. More time allows you to research and learn from the market.

Can Lower the Emotional Stress of Investing

While it is easy to overlook the emotional side of investing, your mental health is worth considering. The market’s volatility can tax your mental and emotional well-being. Bitcoin is more unpredictable than traditional stocks, which are relatively stable.

Because dollar-cost averaging lets you spread out the risk of Bitcoin investments, it prevents nightmare scenarios where you risk losing your entire investment. Price swings are less stress-inducing when your life savings are not on the line.

A long-term perspective helps many investors keep the end goal in sight, preventing hysteric responses to momentary dips in the market.

Disadvantages to DCA in Bitcoin

While we would like to say that DCA is all upside, it does have one major disadvantage that all prospective DCA investors should know about before investing in Bitcoin.

Removes the Possibility of Buying Bottom Spikes in a Bull Market

One of the benefits of dollar-cost averaging is that it allows you to spread your investment over time. However, that can also be a disadvantage. Because you’ve broken up your investment into increments, you may not have a lot of capital to invest if the market bottoms out and crypto becomes cheap.

The same DCA failsafe that protects you from investing all your money at peak prices also prevents you from going all-in when the price drops.

If Bitcoin is experiencing a bull market and experts are predicting rapid growth, the best thing for you to do would be to invest as much as you can as quickly as possible. The price will likely be much higher the next opportunity you get to invest, and you may not want to take that risk.

In this case, dollar-cost averaging can prevent you from being able to invest as much as you might want to. The inability to take advantage of a bull market may be DCA’s most significant downside.

Taking the First Step To Invest in Crypto With DCA

Dollar-cost averaging can be mind-boggling. Don’t let the math and numbers turn you away from a potentially incredible investment opportunity. Not sure where to start? We are here to help.

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