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Ask CryptoVantage: How Do I DCA (Dollar Cost Average) Into Bitcoin?
So far, Bitcoin has been on a rollercoaster ride throughout the year going from its previous price under $30,000 at the start of the year to a 100% all-time high of $66,000+.
The pioneer crypto has been on a tear, with multiple waves of volatility that saw it shed more than 50% of its gains in just a few weeks. However, for seasoned investors and traders, such volatile price swings are nothing new.
One way to add some stability to your crypto portfolio is by dollar-cost averaging into Bitcoin. Here’s what you need to know about dollar-cost averaging into Bitcoin and why it can be a good decision for the long-term investor!
Dollar-Cost Averaging Into Bitcoin: What Is It?
Dollar-Cost Averaging (DCA) is a decent investment strategy for investors and traders with limited funds who are risk-averse. This strategy has proven to help many traders and investors mitigate their losses when markets become hyper volatile.
Dollar-Cost Averaging is an investment technique of buying fixed dollar amounts of a particular investment on a regular schedule, no matter what the price does. The DCA technique was originally designed to help investors get more value out of their money by giving them some exposure to financial instruments (such as Bitcoin) at reduced prices. This same principle can be applied to Bitcoin investing.
It’s best used against a long-term investment goal rather than as a short-term trading strategy.
How Does It Work?
You can set up an automatic transfer from your checking account to purchase the same amount of Bitcoin at regular intervals. In this case, you would become a passive investor and let your investment ride the waves of the market. If you set up a monthly investment plan, it will look like this:
- You deposit $500 every month into your Bitcoin wallet.
- $500 worth of Bitcoin is purchased at the current price (using spot price from CoinMarketCap or any other exchange).
- This equals $500 worth of BTC accumulated over 12 months bringing the total expenditure to be $6000 worth of BTC.
To determine your overall buying price, you will calculate the mean of all the spot prices at which you made a purchase.
What Are the Advantages?
1) Autopilot: The key advantage of DCA is that you can invest your money regularly and automatically, regardless of what happens to the price. This removes the need for you to be glued to your trading charts and know what’s happening to Bitcoin at any time. Most crypto exchanges have built-in options for DCAing into crypto and you can do it for as little as $10 a month on certain sites.
2) Decreased anxiety: As mentioned earlier, DCA helps you reduce the stress of investing in the crypto market. Instead of checking on your investments every 10 minutes, it lets you set up an automatic schedule and simply watch your holdings grow over time. For example, if you invested $1000 per month no matter what, you’d end up with $10,000 in 12 months. This is better than waiting for a perfect entry price as you might wait and eventually miss the boat or buy high and sell low.
3) Dollar-cost averaging also helps protect your investment against market crashes by purchasing more when prices are down. This means that you are investing the same amount of money even if Bitcoin is dropping in value. If it manages to recover, then you will have even more Bitcoin. If it does not, then you are still fine with your average cost per Bitcoin.
What Are the Disadvantages?
1) During an uptrend, there is also a chance that you’ll be buying at market highs. This means that if cryptocurrencies decline sharply, you’ll have bought at a very high price. On the other hand, during a downtrend, you would have been buying more Bitcoin when it was low in value.
2) In a volatile market or bearish trend, your recurring buys will continuously push your average cost per coin higher and higher which can be mentally exhausting if the prices are not recovering.
3) DCAing into cryptocurrencies may occasionally lead some investors to buy coins that are on their way down in value. It’s only natural that you want to be buying new coins at the lowest price, but some folks go overboard with this and end up picking up duds or coins on their way out of town. However, if you believe in Bitcoin’s long-term value, there is no reason to not buy more at the dip.
Is This Strategy Right For You?
Everyone’s DCA strategy is different, but the important thing to remember when investing is that your money should be working for you.
Some investors will prefer drawing their profits regularly and then using them for other investments or a nice vacation while others might actually enjoy seeing their balance grow from month to month.
The idea is that your money should be doing work and not just sitting idle in a savings account. DCAing into Bitcoin is a simple way to get into Bitcoin for whatever amount of money you choose. Over time you might be surprised by how much BTC you can accumulate using these strategy without having to check crypto news every single day and worry about buying at certain times.
