Key Takeaways
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DCA lets you reduce the impact of market volatility, average out your buy-in cost, grow your investment over time, and improve your chances of averaging out your investment with better returns.
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DCA is not ideal for short-term investments and you might end up paying more in fees by buying small amounts of crypto regularly.
Buying the dip is great advice, but timing the crypto market is much harder than it sounds. This is where dollar-cost averaging (DCA) in crypto comes into play. DCA lets you reduce the impact of volatility on your overall investment by investing in your target aset at predetermined intervals regardless of the market’s movement.
This lets you average out your buy-in cost. It also lets you grow your investment over time, improving your likelihood of averaging out with better returns and reducing the impact of market volatility.
What Does DCA Mean in Crypto, and How Does It Work?
Dollar-cost averaging works for new and experienced investors as you can set your investment amount and interval based on your risk appetite and budget.
DCA doesn’t require an investor to read complicated charts with the hope of making their best-calculated guess for buying crypto low and selling high. And even then, many crypto technical analysts with years of trading knowledge and experience won’t be right a lot of the time.
By adopting a DCA strategy to invest in crypto, you won’t have to spend hours per day staring at your computer.
DCA Strategy for Cryptocurrency
The most important thing when dollar-cost averaging cryptocurrency is to plan in advance and stick to it, removing emotions from the equation. This means not giving in to FUD (fear, uncertainty and doubt) or FOMO (fear of missing out), as these emotions tend to play out when investors start panic-selling their assets once prices fall in a bear market, or when they start buying more during a bull market.
Example of DCA Using Bitcoin
Let’s look at an example using the price of Bitcoin on January 1st between the six-year period of 2018 to 2022.
The price of Bitcoin at these times was as follows:
Regardless of the amount of money you invested into Bitcoin on January 1st of each year, as long as you invested the same amount each time, your average buy-in price would be about $17,100.
Now, $17,100 is clearly a lot more than $997.69. But the chances of you timing the market—and having six years' worth of upfront investing capital—is slim. So, a $17,100 average buy price is still significantly higher than if you were to invest a lump sum of money on January 1st of 2021 and 2022.Regardless of the amount of money you invested into Bitcoin on January 1st of each year, as long as you invested the same amount each time, your average buy-in price would be about $17,100.
Now, $17,100 is clearly a lot more than $997.69. But the chances of you timing the market—and having six years' worth of upfront investing capital—is slim. So, a $17,100 average buy price is still significantly higher than if you were to invest a lump sum of money during the highs of January 1st of 2021 and 2022.
How to Get Started with DCA
Once you’ve identified the crypto assets you want to invest in, it’s time to set up your personal DCA plan.
Choosing Your DCA Frequency
There’s no right or wrong approach when it comes to DCA frequency for your cryptocurrency. Examples of intervals that people use are:
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Weekly
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Monthly
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Quarterly
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On the “x” day of every month
Many cryptocurrency exchanges and bots will even let you set the specific time you want them to purchase your cryptocurrency.
Setting Up Your Buy Orders for DCA
To start dollar-cost averaging, you can choose one of the following strategies:
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Manually purchase cryptocurrencies on predetermined dates
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Set up a recurring buy with your crypto exchange
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Use a bot to make DCA purchases
If you want the most passive and economical option, signing up for a cryptocurrency exchange that offers recurring buy choices is the best option. DCA bots like 3Commas are equally passive, although most programs involve monthly or annual fees.
Alternatively, you can manually set buy orders for cryptocurrencies. But we caution you to take care if you choose this method because it’s easier for human emotion to get in the way, such as choosing to avoid a purchase if the crypto price doesn’t meet your expectations.
DCA Vs. Timing/Buying the Dip
Every experienced investor knows it’s impossible to time the market. While there are undoubtedly people who’ve made a tidy profit buying a dip and selling high, it’s impossible to strike such luck every time.
Technical analysis can help experienced crypto traders manually place trades that have a relatively better chance of being profitable. But even then, there are too many variables to guarantee this.
People turn to DCA strategies because it is difficult to time the market for reasons such as:
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Global financial uncertainty
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Influencers falsely inflate a coin’s value
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An asset can plummet from bad company news
News of high inflation, war, or any other situation that causes the stock market to crash often has a similar (if not, larger) impact on cryptocurrency. One of the best examples of this is the March 2020 crash, when Bitcoin fell 41% from $7,900 to $4,600 in one day.
Had you invested a large sum of money when Bitcoin was at $7,969, you would have been devastated the following day. But if you were using the DCA method, you may have bought Bitcoin at around the $7,969 mark, but you also would have been buying it once it crashed and recovered, helping to average your buy-in price.
Although the only thing certain in the crypto world is that nothing is certain, historically, there tend to be more crypto downtrends on the weekends. A theory for this is that banks don’t operate on the weekends, so there’s less crypto trading volume since fewer people have access to their money.
So, while there’s no way to time the crypto market, some people choose to set up their DCA strategy to make purchases on the weekends.
Potential Drawbacks of DCA Strategy
Although there are many benefits to the DCA crypto strategy, it isn’t a fool-proof method. One of the most significant reasons is in the example we described above.
By using DCA to purchase your cryptocurrency, you’ll run the possibility of purchasing an asset when it’s exceptionally high.
DCA also doesn’t account for any good news or upgrades a coin might undergo, which often raises the price temporarily. The asset then usually drops after the hype dies down. But since DCA involves passively purchasing a coin at a set date regardless of price or hype, you’ll have significantly increased your average buy-in price.
Some other potential drawbacks to using DCA in crypto include:
Not Ideal for Short-Term Investments
While DCA can work for short-term cryptocurrency trades, the strategy is best for people who plan on holding their crypto assets for the long term. That’s because, as you saw in Bitcoin’s massive yearly price difference in the chart above, dollar-cost averaging over the years will allow you to buy at more lows in addition to highs.
Lower Short-Term Reward Potential Compared to Spot Trading
Using DCA in the short term could cause you to purchase an asset at an increasingly higher price, especially if it’s a bull market. So, short-term traders might make better profits by using spot trading methods.
Incurring Higher Purchase Fees
Finally, most cryptocurrency exchanges operate off a tiered scale for their trading fees. Therefore, if you invest small amounts of money intermittently, you might pay more in maker or taker fees than if you purchased an asset with the same amount of money in one lump sum.
Final Thoughts
Dollar-cost averaging helps remove the emotion of FOMO—fear of missing out—from buying cryptocurrency.
DCA methods don’t result in extraordinarily high returns. However, it’s an often effective and relatively safe option for traders wanting to build a long-term crypto portfolio.
Lastly, doing due diligence to ensure you invest in a cryptocurrency you believe will survive in the long term is vital while remembering that crypto is a volatile market, and no one can guarantee returns.
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CoinGecko's editorial team comprises writers, editors, research analysts and cryptocurrency industry experts. We produce and update our articles regularly to provide the most complete, accurate and helpful information on all things cryptocurrencies. Follow the author on Twitter @coingecko
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