Ask CryptoVantage: What’s the Best Way to Take Advantage of Dollar Cost Averaging?

What is Dollar Cost Averaging?

Dollar cost averaging is an investment strategy in which the investor makes multiple smaller investments periodically over time rather than investing the full amount upfront. Typically, the investor will decide on a predetermined amount to invest on a specific schedule – for example, they may invest $200 on the first day of every month.

Dollar cost averaging is one of the most recommended strategies for investing in bitcoin. Historically, dollar cost averaging has been shown to be very profitable on almost any timeframe (take a look at the historical performance calculator for dollar cost averaging here). Investing on predetermined intervals also de-risks your investment because investing small amounts regularly, regardless of the price of bitcoin, decreases the impact that bitcoin’s volatility has on the total investment over time.

It is easy to be tempted to try to take advantage of bitcoin’s volatility in order to make short-term profits, but attempting to time the market is risky. For the most part, only highly experienced investors are successful with this. Dollar cost averaging provides an opportunity for non-experienced investors to enter into the bitcoin market in a steady, and arguable safer, manner.

For more information about bitcoin investment strategies, take a look at our article “What’s the Best Basic Strategy for Bitcoin Investing”.

Dollar Cost Averaging Strategies

If you are going to move forward with investing in bitcoin using dollar cost averaging, the first thing you will need to do is set the rules of your investment strategy. The two factors you need to consider are:

• Frequency: How often will you make your investments?
• Amount: How much are you willing to invest at the frequency you have chosen?

When selecting an investment frequency and amount, you should consider whether it is both affordable and maintainable. The amount you choose should be well within your budget so that you will not need to cancel your dollar cost averaging strategy in the future. Cancelling the process early will affect your chances of profiting from your investment.

When selecting an investment frequency, you may also want to consider the effect it will have on the average price at which you purchase bitcoin. Making smaller investments more frequently (for example, every week instead of every month) will result in your investments being closer to the true average price of bitcoin over that time period. There is no right or wrong answer in terms of investment frequency, but more frequent investments will decrease the risk of being impacted by bitcoin’s volatility.

As you can imagine, frequent investments can be time consuming. If you go about this process manually, it can be easy to miss purchases – or stop altogether. This increases the chances of straying from your investment strategy. The best way to take advantage of dollar cost averaging is through systems that automate your payments.

Automatic Dollar Cost Averaging

Automatic dollar cost averaging simplifies your investment strategy so that you do not have to think about, or remember to make, your routine investments. Having your investments made automatically also makes it less likely that you will try to time the market when you notice bitcoin’s price rising or dropping. In general, automatic dollar cost averaging helps ensure you will stick to your original investment strategy.

Some examples of popular exchanges that provide automatic dollar cost averaging services in the U.S. are Swan Bitcoin, Cash App, and River Financial. For a more complete list of automatic dollar cost averaging providers in multiple countries, take a look at Bitcoin DCA Tracker.

Conclusion 

Dollar cost averaging is a method for de-risking your bitcoin investments because it decreases the impact that bitcoin’s price volatility has on your portfolio. This strategy has proven to be beneficial to bitcoin investors when routine payments are maintained over time. The two keys to forming a successful dollar cost averaging strategy are: 1. make sure that the frequency, and amounts, you plan to invest are affordable, and 2. find ways to automate the investment process. The more hands-off you are with your investments, the more likely you are to stick to your predetermined investment schedule.