What Is DCA In Crypto?

What Is DCA In Crypto?

DCA stands for Dollar Cost Averaging. It basically means you forget everything you ever learned about trading, and you invest a set amount per month or week, and you don’t deviate from that.

It’s incredibly bland. And incredibly powerful.

No swing trades, no RSI, no MACD. You pump $X into the investment of your choice for a prescribed period of time, then HODL. People will do this once a month or, if they work, every paycheck. The price doesn’t matter, the momentum of the trade doesn’t matter.

It’s incredibly freeing.

You’re filtering out market noise when you DCA. Volatility means nothing to the DCAer. It requires no brainpower or trading acumen. You point and click and forget about it.

How Does DCA For Crypto Work?

Dollar-cost averaging for crypto is no different than dollar-cost averaging for the S&P or dollar-cost averaging for cans of beans. You average your cost, hopefully averaging down, and move on to other things.

It isn’t specifically a crypto thing, this dollar-cost averaging, but it can be applied to crypto trading and investing without needing to adjust much.

Benefits Of DCA’ing Crypto

Here are some benefits of DCA’ing crypto:

1. Free time: Ever seen the movie 23? How about Pi? What we’re getting at is you can go down the rabbit hole and waste years of life trying to get a 1% edge. Why not DCA and stare out the window instead? When you automatically invest, you don’t need to study charts or any of that. You basically go all in but over a longer period of time. You perform your initial due diligence, then set the rest on autopilot. It’s freeing, which we’ve said a few times, but hammering that point home because it’s a big deal.
2. Emotional regulation:Imagine sleeping through the night. Imagine a world where you don’t study charts six hours a day and live full of anxiety. By DCA’ing, you can chill a heck of a lot more than if you were trying to time the market.
3. Risk management:Humans mess up, it’s what makes us beautiful. It’s also what makes us broke. DCA’ing removes the human element. You could probably add more during a DCA if you want, but you wouldn’t mess with the initial strategy.

Is Dollar Cost Averaging Crypto Risky?

If there is no risk, there is usually no reward. That’s why we don’t just all buy bonds, right?

Dollar-cost averaging isn’t as risky as trying to time the market, but it does have its own risks, namely:

1. Volatility: If you choose to invest on the first of the month, and the price absolutely rockets that day, you could buy at the top. Buy high, sell low isn’t the best way to earn.
2. Flexibility: DCA sets you in a groove, and the whole idea is to not deviate. That can be hard to do if you spot an opportunity.
3. Loss potential:Although DCA’ing is one of the better trading systems for emotional regulation, it can be pretty hard to relax if you’re averaging down in a falling market. Long-term studies show this is the best strategy, but it’s…not easy.

A DCA Crypto Example

DCA works by investing a set amount at a specific time. Let’s use Bitcoin as an example.

Your DCA strategy is to invest $500 a month, once per month, on the 1st.

Because you’re such a diligent investor you stick to your strategy. You do it for six months. It looks like this:

• Month 1: Bitcoin price: $25,012
• Month 2: Bitcoin price: $21,056
• Month 3: Bitcoin price: $29,573
• Month 4: Bitcoin price: $12,004
• Month 5: Bitcoin price: $15,884
• Month 6: Bitcoin price: $21,000

Your average cost-per-share, or cost per unit invested, is$20,754.Your investable average is lower than when you started ($25,012), and you have done literally zero market research.

Dollar-cost averaging doesn’t always work out so well, but in this example, by DCA’ing, your Bitcoins costs 20.5% less.

Month two comes, and you invest. Month three comes, and you invest. You flatten the volatility, lower your average, and, most importantly, remove the emotional component.

How To Calculate

Calculating for DCA is incredibly easy. You take the price of your shares and average it. You can see that clearly in the example above, but here’s an even easier-to-understand breakdown:

Cost of each share/number of investments made = dollar cost average

Add, add, divide, and you’re done. Most trading software will show your average cost. That’s your DCA.

Frequently Asked Questions