The Dollar-Cost Averaging (DCA) is one of the most reassuring methods for users who invest in risky assets.
It is ideal for people who do not have the time or knowledge of the market to trade.
It is a strategy that gives many advantages and is far superior to hodling or hoarding cryptocurrencies.
Placing capital in cryptocurrencies under no circumstances ceases to be risky for users. However, DCA or dollar cost averaging is one of the best strategies to invest in Bitcoin with lower risks. This paper explains in general terms what this low-risk way of saving money consists of.
Within the world of cryptocurrencies, hodling is one of the favorite strategies for long-term savings. However, hoarding for long periods can be done in a more elastic way with DCA. This is because it involves buying coins by fractions and in a spaced manner. Consequently, it might be more profitable to buy a Bitcoin in installments than to do it in one transaction.
The latter is due to sudden drops in the currency. Thus, buying a BTC today could lead to losses if tomorrow its price decreases. On the other hand, buying a fraction today and then continuing to buy if the price drops is a great advantage since it generates an average. With the same amount of money you can buy a larger volume of BTC if you divide the amount into several fractions and buy over a longer period of time.
Investing in Bitcoin with the DCA Strategy
Bitcoin’s volatility makes investing in that asset successfully become an art and with DCA a lot can be achieved. The method consists of taking time frames (e.g. weekly). Thus, each week a certain dollar amount (PE. $200) is purchased. This implies that the bulk of the users’ money will remain in USD or in a stable or fiat currency in their bank account.
If the value of the cryptocurrency, now at $24,500, drops over the next 3 months to the $20,000 range, the investor will have greater opportunities. That is, he would make 12 purchases worth $200 each or $2400 in total. That hypothetical sum would be equivalent to 0.12 BTC. Had he bought the $2400 today, in a single transaction, he would have 0.097 BTC.
On the contrary, if it happens that Bitcoin rises from the current price to $30,000 during the same 3-month time frame, I would certainly buy less. However, that would only be 12 purchases for a total of $2400. That translates to when it goes down again you will have had less exposure to the high price and would continue to buy at a lower value. Losses could also occur in this scenario.
But if that mechanic is repeated several times over 2 or 3 years, the end result is that the user would have bought more fractions. If in that time the price of BTC rises sharply, it will also have experienced frequent drops and the investor will have bought in all of them. The image below shows the advantages of investing in Bitcoin with the DCA.
Example of investment process
If an investor had bought 1BTC on June 01 at $29,800, despite today’s rally, he would have -$5,300. If he had instead set up a DCA with a daily purchase of $413 over those 72 days to Aug. 11, he would have a profit of $2,667.
For more timely data, instead of buying 1BTC on June 01 valued at $29,800, the investor decided to divide that sum by 72 days, i.e., he bought $413 per day. By August 11, instead of owning 1BTC at a loss of -$5,300, he now owns 1,346 BTC worth $32,467. In this example, the investor started out buying very high, but took advantage of all the price drops. During June, he bought 0.55 BTC; in July 0.6 BTC; and so far in August he bought 0.195 BTC.
It should be taken into consideration that these numbers are approximate, since the exact result depends on the time at which each of the daily purchases was made. In this case they were taken randomly.
With this illustration you can understand some advantages of the DCA when investing. Although the investor had a bad entry, the recurring time slot gave him the opportunity to make amends. From now on, the chances of a drop like the one in June are slim, at least in the short term. This can be interpreted as a steadily and moderately rising price accompanied by respective corrections.
Initiating a DCA plan now would have better prospects than those in the example above. As will be seen below, this is an elastic investment model that users can adapt to their buying capabilities.
Possible ranges for investing in Bitcoin with DCA
An important aspect of this method is that it can be adapted to the financial possibilities of the investor. A person with a low income who wishes to take advantage of this new form of money can place sums as low as the capacity of the platform on which he or she buys cryptocurrencies allows.
The investor can opt for an amount according to his saving possibilities from $5 or $10 dollars onwards (depending on the exchange). There is no established limit and it can be $100, $200 or $500 dollars. In terms of time, the term can be daily (even twice a day if you want), weekly, biweekly or monthly. Many analysts recommend quarterly injections in stocks, which are less volatile than cryptocurrencies.
If the person who wants to invest in Bitcoin with the DCA has $500 of his monthly salary to save, he could decide between the following options:
Daily plan: $16 per day.
Weekly plan: $125 per week (for example, every Saturday).
Bi-weekly plan: $250 every two weeks.
It can be played with variables every 3, 4, 5 or the desired frequency of days. The point is that not all the capital available to invest in Bitcoin is not transacted in a single operation, but in a fractional fixed amount, that is what the DCA is all about.
It should be noted that recurring purchases can be made manually, i.e. they are purchased in a P2P and sent to a self-custody wallet. The problem with this is that for each shipment the corresponding transaction fee must be paid.
Options from centralized platforms
There are options that facilitate the process such as centralized exchanges (CEX). The most important of these platforms offer the DCA service in an automated way and the user only has to program the plan according to its amount and time frequency. Once this is done, the platform takes care of the rest. In this case, subtracting the amount from the bank account and transforming it into BTC.
“The DCA modality allows splitting investments, which decreases the effects of the volatility of some assets such as cryptocurrencies”
Similarly, the user can leave the mondo in a stable currency such as USDT in the spot wallet and the exchange automatically transforms the programmed amount. A user who has $500 a month and leaves it in the spot wallet, with a DCA to invest in Bitcoin daily, every 24 hours will see the subtraction of $16 dollars automatically, the same that are transformed into fractions of Bitcoin and go to the savings wallet.
Some platforms offer daily rewards to people who leave money in BTC in savings accounts. Similarly, they offer varied options and not only in Bitcoin. With this, a person who is confident that another currency will rise in the future can choose it and apply a savings plan with the same parameters. The advantage of these platforms is that users can save on transfer fees.
Taking into account the danger of having money on exchanges, users should choose the platform carefully. It is advisable to focus on the most important ones with the highest guarantees of security, regulation and due licenses in their respective countries.
Some real examples of successful investments
A user (who requested anonymity) talked to this media and told his story. He relates that in 2018 he started the process of buying $50 per week and in January 2021 he reached the coveted goal of 1 BTC. The average cost of his BTC was just over $7,200. Shortly after he completed his goal, the price of the pioneering digital currency reached $60,000.
“It became my religion. Every Sunday I would hand over my $50 tithe to Bitcoin without fail. That’s how I got my first BTC by investing without a care in the world, no beers, no nights out. I really became an ascetic,” he explains via Telegram.
Although the past behavior of an asset is no guarantee of future results, the trend of cryptocurrencies seems clearly defined. The scarcity of Bitcoin and the steady growth of its demand make the appreciation of its value an almost natural matter. The latter if one takes for granted that the law of supply and demand is a real factor.
On the other hand, it should be noted that the result of investing with the DCA method in Bitcoin is a matter that pays off in the long run. It can be said to be equivalent to hodling, but with a higher-powered engine. Some users take advantage of price hikes to withdraw profits and add them back into the cycle of recurring purchases. With that feedback they further increase capital while increasing risk.
Either way, investments with this method are one of the most demanded tools by conservative hodlers who do not wish to take risks with wild trading. The advantages are considerable with this way of saving, but that does not mean that the methodology is free of risks and disadvantages.
Disadvantages of investing in Bitcoin with the DCA method
Just as this mode of investing and saving has numerous positive features, it also has disadvantages. The first is that it requires a lot of discipline and consistency. For people with limited resources it can be difficult to keep the sequence uninterrupted and that leads to missed buying opportunities during price drops.
The same investment mechanics of this savings plan mean that in bull markets it does not offer good results. In that sense, during a bull-run it is more profitable to make a single purchase of 1 BTC, since the currency will continue to rise thereafter. Investing in Bitcoin DCA during a bull-run means buying higher and higher fractions, which is counterproductive.
In the latter case, if the market corrects, the losses would be greater. It should be noted that this is where discipline and patience come into play, since, if the correction comes, the idea is to keep the plan working to take advantage of the fall. For people who do not have enough money to buy 1 BTC in a single operation, the spaced investment is one of the few alternatives after the current hodl.
Outside of cryptocurrencies, if the DCA strategy is applied to other assets, the risks are a bit higher. For example, if you open a plan to buy shares of a company that is gradually going bankrupt, the end result will be the total loss of your savings. The same applies to failed cryptocurrencies in a scenario similar to what happened with Terra’s LUNA and UST.
The aforementioned transaction fees can play a very negative role if savings are made in coins whose networks have low scalability.
The spaced method of investment is widely used
The DCA investment modality is not new in the financial world and is used by a considerable breadth of sectors. Among them are pension funds, which extract percentages of the salaries of people who save for their withdrawals. For decades it has also been used as a tool for investments in risky stocks.
“The disadvantages of DCA are expressed during bull markets, as each purchase is made at a higher price.”
The history of the method dates back to the publication of the book The Intelligent Investor by the legendary Benjamin Graham. In that publication the term Dollar-Cost Averaging was coined for the first time. The author explains, with characteristic strokes of the pen, the advantages of this method for certain types of investments, especially in volatile stocks.
Investing in Bitcoin, as you might guess, is not the exclusive use of DCA. In fact, in bearish conditions like the current ones it is one of the main recommendations for investors in the stock market. Most stocks are in steep declines and many people don’t know whether to get in now or wait for them to reach deeper.
Faced with the uncertainty of not knowing whether stocks are too high or too low, entry with the DCA seems to be the most popular, as indicated by some specialized portals. “Spreading out purchases allows you to average into a position. Some buys may be excellent entry points, others may be poor entry points. But in theory, your average cost basis over time will be attractive,” writes fool.com.
Some variations of the DCA model
For an investor looking to enhance their experience, there is also the option of varying the DCA model with a similar one, Value Averaging (VA). Both forms are similar in modality, but vary in the amounts of investments placed in particular assets.
Thus, without changing the investment time intervals, investors change the dollar amount of money they put into the asset. Keeping the Bitcoin example, if a person buys weekly in that digital currency, he will no longer do so with the same amount of money. The amount will vary according to the price of the currency at the time of investing.
That way, if on the corresponding day of the week the price of BTC goes down, then the amount of money to invest would increase. On the other hand, if the price goes up, then the amount in USD to invest would be lower. In the example of the imaginary person who invests $500 USD per month, he would no longer put $16 USD per day in purchase, but it could be $20 if BTC goes down or $10 if the price goes up.
With the VA model, the result could be better than with the DCA. In assets such as cryptocurrencies, whose price varies every minute, it would be a tool of considerable success if the user spends enough time to change prices and time of investments on a daily basis.
The problem with investing with VA is that, if a downtrend lasts longer than expected, the user could run out of money to invest. It all depends on the variables you use.
Once you know some of the main elements of this spaced investment strategy, it is important to keep in mind a few points. Most importantly, there is no foolproof strategy for investing in cryptocurrencies or other risky assets.
As in any investment method, in DCA there are risks that can lead to loss of funds. It is therefore recommended to proceed cautiously or seek professional help. That said, it is emphasized that this alternative is less compromising than most forms of market entry, indicating a greater likelihood of a happy ending.
In addition, this is an ideal tool for people who are new to investing or for those with less tolerance for risk. For investors new to the market, it is common to make mistakes that lead to disappointments due to hasty strategies. However, with the DCA, you can find a balance in the face of how difficult it can be to find an entry point.
Bitcoin investments are promising going forward, but at the same time the investor must pay for the wait with the disruption of their peace of mind. Volatility causes headaches for the crypto community, so spreading out investments could be a good option to average out and avoid heavy losses (and sleep easy).
To avoid disappointment with DCA, one should avoid falling into fear. That is, never cut the investment when there are sharp price drops. Similarly, important factors such as the loss of fiat money value if the investment is to be made for long periods should be addressed. If the latter becomes a problem in developed economies, in underdeveloped countries where currencies are more unstable, it is an ordeal for investors. In countries with high depreciation of their currencies, such as Argentina or Venezuela, investors would choose to keep the bulk of their savings in USDT and not in peso or bolivar. There would still be losses due to currency devaluation, so it is essential not to lose sight of this variable if you wish to invest in the long term
Platforms offering DCA
If the investor has weighed the possibilities of this method and decides to try his luck, there are several ways. The recommended way is to do it manually, that is, buying in a P2P or with a credit card in an exchange . Then send the purchased sums to a cold or self-custody wallet. As mentioned above, the costs involved are higher. The user will have to pay network fees for each transaction and will not receive annual returns for hoarding.
The second option, very risky, is to adopt an automated plan in an exchange. If this is the investor’s desire, the recommendation is to look for the most reliable and largest platforms on the market. For now, Binance, KuCoin, Coinbase and eToro offer alternatives to set up spaced investment plans and pay returns for holding funds on them.
Again, keeping funds on an exchange is highly risky, especially considering the recent cases of bankruptcies of some platforms.
The DCA is not the only strategy for proven and safe investing in cryptocurrencies. Explore other ways to invest in Bitcoin by following this link.