Investing in cryptocurrency requires certain skills to mitigate your risk of loss. Fortunately, there are different crypto investment strategies that can help you achieve this. But it is normal to see investors seek the best approach to build a longer-term investment position. When it comes to crypto investment, the Dollar Cost Averaging technique is one that is used by many to reduce the risks involved. So, what is DCA in crypto? This article guides you on everything you need to know about it.
Understanding Dollar Cost Averaging (DCA) in crypto
Dollar cost averaging refers to the technique of buying smaller but equal amounts of crypto on a regular basis, as opposed to making large or irregular cryptocurrency purchases. It is an investment strategy that strives to lower the effect of volatility on the acquisition of assets.
Although cryptocurrency is considerably more volatile than traditional stocks, using the DCA strategy with crypto helps you to reap so many of the exact rewards that traditional equities investors enjoy when they use the strategy. By buying equal amounts of your favourite crypto coins regularly, you’ll certainly be making better and more reasonable investments over time no matter what happens in the crypto market. This allows you to grow your crypto assets, and can conveniently lower your general cost-basis during market dips.
How does Dollar Cost Averaging with crypto work?
The DCA tactics basically involve splitting up your investment into smaller bits. Essentially, it helps to reduce the risk of investing at the wrong time. For instance, if you want to invest in crypto with $10,000, you can split up this $10,000 into 100 chunks of just $100. Subsequently, you are going to purchase $100 worth of Ethereum (ETH) every day, no matter what the price. By doing this, you are going to stretch out your entry to a duration of just over three months. You can practice this with flexibility as long as you maintain your purchase at a fixed period.
DCA vs. Lump-sum investing
Whenever you invest a single lump-sum of cash into crypto (or any other investment), the total value of your investment holdings is dependent exclusively on the general ups and downs of the coin price. However, by using a dollar cost averaging investment strategy you can mitigate some of the risks involved in price volatility over a period of time by making extra acquisitions during market dips. The dollar cost averaging strategy is particularly lucrative during times when market conditions are depressed.
How to start investing in crypto with a Dollar Cost Averaging strategy
Are you prepared to try out the dollar cost averaging strategy as a crypto investor? If you are, here are a few things you must consider before diving into it:
1. Decide on the type of token/cryptocurrency you want to buy
For the DCA technique to be effective for you in the long run, selecting a token that is expected to exist and rise in value in the future is extremely beneficial. Hence, it is wise to only invest in stable crypto coins when using the DCA strategy. Currently, Bitcoin (BTC) and Ethereum (ETH) are regarded as the most stable crypto project. So these two cryptocurrencies are primarily used to execute this strategy.
2. How often will you invest?
Many crypto exchanges offer investors the option of making automatic purchases at regular intervals – either daily, weekly or even monthly in some cases. It doesn’t really make sense to use daily or weekly auto purchases for slower-moving assets such as formal securities. However, crypto’s high volatility allows you to feasibly utilize the DCA strategy with greater and better frequency than you have when purchasing traditional stock. As usual, ensure that you invest only the leftover money you have after sorting all your basic needs.
3. How much money will you invest?
All kinds of investments have risks, but since the crypto market is extremely volatile, it is advisable to invest only money that you can afford to lose. Explore your monthly budget and decide how much discretionary revenue you need to commit to your crypto investment and don’t exceed that set figure.
4. Where will you purchase your cryptos?
There are several trading exchanges that offer investors recurring purchases, which is convenient. However, the convenience will come at a cost. These exchanges may not always offer you the best rates and can even add expensive fees on top of each purchase you make. Hence, you must compare the rates of each platform before you decide which one to use. Go for the exchanges that offer you tokens at the best price and with favourable conditions.
Bitmama is easily the best option for this as it offers secure P2P and instant purchase options for traders. You can purchase a wide array of coins in only a few steps. Get started today by downloading the Bitmama app on Android or iOS.
5. Where will you store your investment?
Choosing where to keep your crypto assets safe and secure is largely a personal decision. There are numerous kinds of crypto wallets. If you want to use a custodial crypto wallet, ensure that the one you settle for has a substantial reputation and an already verified security track record. For more professional users who decide to choose to self-custody, there are many crypto wallets you can choose from. Just ensure you research well about a wallet before you use it.
With Bitmama you can both purchase and store your coins in one place. Already offering a robust marketplace, it also offers a crypto wallet to directly store your coins.
What are the potential drawbacks of DCA crypto investing?
Certainly, there are no entirely infallible investment strategies, and so the DCA crypto tactics can also have some disadvantages and bad risks. Automatically buying crypto at fixed intervals implies you could end up spending more money for only smaller amounts of tokens, especially if the market climbs sharply. Essentially, this has a contrasting intended effect of the DCA tactics, and can even increase your cost-basis if multiple recurring purchases happen after a significant upswing.
Some crypto traders prefer lump-sum investing during market dips hoping for greater gains. However, actually attaining those profits requires you to successfully time the crypto market, which is extremely hard to do if you are contending against institutional and/or automated traders.
Is a DCA crypto strategy right for me?
Using the DCA strategy in crypto is generally a consistent, easy way to create a crypto portfolio. This holds, especially for novices or people who don’t always want to be looking at a screen. If you prefer to invest more in cryptocurrency, but always see yourself in “analysis paralysis”, employing the DCA strategy can help instantly relieve your tension and set up a relatively stable portfolio for you over time.
How can Dollar Cost Averaging protect your investments?
When you make recurring crypto purchases over time in a specific amount, you’re basically withdrawing all emotional sentiments from your investment equation. It can be very tempting to pull out a lump sum of the investment amount of the market during a dip, even if it saves you from a loss as a result. However, this can cost you big-time profits if the crypto you bought increases in value after selling off.
How long should I use a Dollar Cost Averaging strategy?
This generally depends on certain factors like your financial goals and investing horizon. Ideally, this technique is something you can even set and forget, without really having to always monitor your crypto portfolio. However, true dollar cost averaging usually occurs over a prolonged period of time, generally at least between 6-12 months. Essentially, this is a form of long-term crypto strategy.
How often should I use a Dollar Cost Averaging crypto strategy?
You don’t have to use the Dollar cost averaging strategy for the entirety of your crypto investment. Usually, investors use DCA for just a portion of their crypto holdings even if most of their other purchases are acquired in lump sums.
So, what is the meaning of DCA in crypto? It is simply buying equal amounts of cryptocurrencies at regular intervals. If you’re hoping to employ this strategy in your crypto investment, you should already know the type of coins you should be targeting – mainly Bitcoin and Ethereum.
However, if you want to purchase other coins for this strategy, ensure that you do your due diligence about the market. This is because the DCA strategy is more applicable for long-term crypto investments. Lastly, only commit your spare money to invest in crypto. Never invest any cash you can’t afford to lose.
As the best crypto exchange app in Africa, Bitmama offers a secure marketplace for crypto enthusiasts. Perform activities like crypto exchange, crypto staking, and creating virtual dollar or crypto cards for online payment. Get started today by downloading the Bitmama app on Android or iOS.