There’s a big problem with the world of crypto trading right now.

Cryptocurrency lowers the barriers to investing for everyone, but too many people are going into it without a clear strategy for their goals. 

While it’s definitely the future of finance, crypto can still be confusing, volatile, and uncertain. Fortunately, you can use investment strategies like dollar-cost averaging to lower your risk and still reap the rewards. Best of all, by the end of this six-minute guide, you’ll know everything you need to get started today. What are we waiting for? Let’s go!

What Exactly Is Cryptocurrency?

Cryptocurrency is simply digital money. Just like the money in your pocket, you can use it to:

  • Buy and sell goods
  • Trade or invest long term
  • Keep accounts

However, it differs from traditional money in some key areas. For one, governments and banks issue the cash you have in your wallet (and the money in your bank account). Crypto is different: it’s governed by its users. How exactly does that work?

Every transaction made using a cryptocurrency is recorded on a database called the blockchain. It’s a distributed ledger that updates simultaneously on different computers around the world. All data is secured with robust cryptography, so coin users can trust their transactions are safe and valid.

What Is Dollar-Cost Averaging (DCA)?

Usually, when you invest, you put in all your money at once. Dollar-cost averaging (DCA) is an alternative investment strategy. Instead of investing a lump sum, you spread out your investment into smaller quantities over some time.

You start by deciding how much you want to invest in total. Then, you spread out your trades into equal installments over a set timeline. 

For example, say you’d like to invest $3,000 in Bitcoin:

  • Lump-sum strategy: Investing a total of $3,000 today.
  • Dollar-cost averaging strategy: Invest $500 on the first day of every month for the next six months.

The ‘dollar-cost average’ in question is the average price at which you buy the asset over time. Why would anyone opt for a dollar-cost averaging strategy? Let’s go over a few pros and cons:

Pros of Dollar-Cost Averaging

  1. Spreading out your trades means you’re buying assets at different prices. That means the price you’re paying reflects the value of the asset more accurately.
  2. Dollar-cost averaging ensures you don’t invest all of your money at a market high (or tops). Since you’re buying during different periods, you’re never really getting a bad deal.
  3. By the same logic, dollar cost averaging also means you get to take advantage of market lows. If you invest all your money at the start, you might not get that opportunity.
  4. It’s an excellent framework for long-term investors. Spreading out your investments removes the chance for you to make emotional or irrational decisions.

Cons of Dollar-Cost Averaging

  1. You could miss out on big profits earned from larger investments. High risk typically means high reward, and a DCA strategy is relatively low-risk.
  2. Dollar-cost averaging may underperform in a bull market. In markets that tend to go up consistently, you might be better off investing a lump sum all at once.
  3. Since you’re making frequent investments, you’ll likely see more trading fees than usual. But if you’re investing long-term, this isn’t a huge problem.

Using A Dollar Cost Averaging Strategy in Crypto

The DCA investment strategy applies across many securities, but we’re most interested in how we can use it to win the crypto markets. Let’s look at dollar-cost averaging in crypto based on two pillars: volatility and timing.

How to Use DCA to Beat Volatility

The cryptocurrency market is the most volatile one available to investors today. Fortunately, dollar cost averaging is best suited for unpredictable markets. With a DCA strategy, you can hedge against the wild highs and lows that cryptocurrency is known for. Even better, you could end up owning more crypto for the same price. Let’s use Bitcoin as an example, starting on January 1st of 2018:

  • Lump-sum — investing $1,850 into Bitcoin would result in a return on investment (ROI) of 318% by the first of October 2021: you’d own 0.137 Bitcoins.
  • DCA  — buying $50 of Bitcoin monthly until October 1st, 2021 would give you an ROI of 661%. With a Bitcoin dollar cost average of $7,392.74, you’d own 0.25 Bitcoins.

Same dollar amount invested, but more than double the ROI.

How to Use DCA to Time the Market

Timing the market is tricky enough in the stock market, and it’s been around for decades. How on earth can DCA help you with crypto?

Well, one side of the dollar-cost averaging coin is about not trying to time the markets. DCA trades are typically made automatically, so they’ll occur at highs and lows alike. The point is that you’ll sometimes make trades you’re happy with, sometimes not so much. Since you’re building wealth over time, the average price will be a good deal.

However, you don’t need to limit yourself to recurring trades that happen weekly or monthly. You can use more advanced trading tools like the stock-to-flow model to predict price swings and buy at the right time. The goal here is to get your dollar cost average as low as possible. You can also try grid trading: buy whenever a coin falls below a specific price, then sell whenever it reaches a higher price again. (More on grid trading later).

The Best Cryptocurrency Exchanges for Dollar-Cost Averaging

Many cryptocurrency exchanges allow you to make recurring purchases of Bitcoin, Ethereum, and other coins. Here are some of the most popular ones:

  • CashApp: If you’re based in the US and are only interested in Bitcoin, CashApp lets you buy $BTC on a daily, weekly, and biweekly basis.
  • Coinbase: One of the biggest exchanges globally, you can set up and cancel scheduled buys via web app or mobile device.
  • Gemini: Also makes it easy to create a recurring buy schedule for various cryptocurrencies.
  • Binance: The platform’s wide variety of coins makes it an attractive option for DCA traders.
  • Crypto.com: You can use crypto, cash, or credit to make recurring purchases on Crypto.com’s exchange platform.

Start Profiting From Cryptocurrency Today

Cryptocurrency is as volatile as ever. There’s news about Bitcoin every week. New terms are thrown around left and right. 

With so much going on, it might seem impossible to make money using crypto. So we’re lucky we can use strategies like DCA and grid trading to lower risk and still reap the rewards.

Curious about how exactly to profit with cryptocurrency? Marketing guru Dan Hollings has spent years developing The Plan, a crypto investment strategy that uses grid trading bots to generate passive income every day. If you’re interested in learning how to use The Plan to earn money while you sleep, check it out here!

Frequently Asked Questions

Is dollar-cost averaging good for Crypto?

DCA strategies are highly applicable to volatile markets like crypto. Since your investments are spread out over an extended period, you’re more likely to buy the asset at a fair price.

Can dollar-cost averaging make you rich?

Dollar-cost averaging is ideal for building wealth over time. It likely won’t make you rich in the short run, but it’s handy for generating income over the long term. Like any smart investment strategy, DCA only has the potential to make you rich.

What is dollar-cost averaging bitcoin?

DCA for Bitcoin is an investment strategy where you buy equal amounts of Bitcoin at regular intervals. The system is most beneficial in volatile markets where you’d like to invest in an asset for long-term goals.