“Buy the dip” and “Sell the highs” sounds like a simple idea until you discover that the volatility of cryptocurrencies is making you restless and anxious. Every minute that you are away from the trading charts starts getting you worried that the market will do something totally unexpected. In addition, you probably have your regular job and other commitments; hence, staying glued in front of a screen watching thin squiggly lines is probably not the idea of financial freedom that you envisaged when you decided to join the crypto craze.
Day traders might enjoy the rollercoaster ride of the exhilarating highs and gut-wrenching lows of the crypto market. However, if you are level ended and playing the long game in crypto, then you’ll most likely be interested in applying a traditional Wall Street strategy called dollar cost averaging (DCA) in your cryptocurrency investments. This piece provides insight into all you need to know about how DCA and how it can make you a better investor in the long term.
What is Dollar Cost Averaging?
Dollar Cost Averaging (DCA) is a Wall Street concept that has been imported into the world of cryptocurrency trading and investments. It simply refers to a strategic move to buy the same dollar (or any currency) amount of a cryptocurrency at regular intervals irrespective of the prevailing market price of that cryptocurrency on such intervals.
How Does DCA Work in Crypto?
To use dollar cost averaging, you’ll start by setting aside the amount of money you want to invest in a cryptocurrency. You can also place a standing order on your bank account to transfer the daily, weekly, monthly, or quarterly portion into the account that funds your crypto trade.
For instance, if you have $1,000 to invest on Bitcoin (or any other cryptocurrency), you’ll be able to buy 0.084745 BTC at the current $11,800 trading price. However, the trading chart (below) shows that Bitcoin has traded significantly under $11,800 for much of the last one year. Hence, it’s somewhat difficult to know if you are buying low or buying high at current prices.
However, instead of buying $1000-dollar worth of Bitcoin once, you can split the money into 10 equal portions of $100 each and you’ll purchase $100 worth of Bitcoin on the 6th day of every month for the next 10 months.
At the end of the 10 months, you would have bought a slightly higher or lower amount of Bitcoin than the 0.084745 BTC that your $1000 would have bought originally.
If the price of Bitcoin falls lower over the next 10 months, you might have a slightly higher amount of BTC. If the price of Bitcoin rises higher, you may have a slightly lower amount; but ultimately the price volatility would have evened out over that period.
If we flip the chart over to assume that you’ve been buying equal portions of Bitcoin over the last 10 months, it becomes quite obvious that the number of times when you would have bought at a rising price tends to counterbalance the number of times in which you would have bought Bitcoin at a lower price.
What is the Best Platform for DCA for Crypto?
You can buy cryptocurrencies on any of the popular exchanges, but it appears that Skrill offers the best solution for taking advantage of DCA when buying cryptocurrencies. The best way to take advantage of dollar cost averaging is to automate the purchase actions so that you can limit the odds of your emotions getting in the way of regular purchases.
Skrill is leveraging its almost 20-years of experience as a payments company in its cryptocurrency business to provide customers with tools to buy cryptocurrency from their balance in local fiat currency (EUR, USD, etc.). Hence, Skrill allows user to hold an interest in a range of cryptocurrencies via a single platform that holds both their fiat payments and crypto holding.
Dollar cost averaging is integrated into Skrill through automated orders that allow you to set the number of cryptocurrencies you want to buy over time without having to manually place purchases in intervals.
Who Should be Using Dollar Cost Averaging?
Different trading and investing strategies are best suited for different classes of traders and investors based on available funds, risk appetite, and trading experience. If you fall into any of the three categories below, you should be taking advantage of dollar cost averaging.
If you are new to cryptocurrency trading and investing; in fact, if you have never experienced a cryptocurrency bear market, you should ease yourself into the rollercoaster volatility of cryptocurrencies by talking advantage of dollar cost averaging. At the height of the 2017 bull run, Bitcoin was trading above $19,000.
Many newbies rushed into the market at a time when veteran traders had spotted the top. By the time 2018 got underway, Bitcoin crashed more than 70% -- it was trading as low as $3,300 in December 2018.
If you had invested $1000 in Bitcoin at the height of the bull run in December 2017, the bear crash would most likely have broken your heart, you would have sold your remaining Bitcoin for whatever it was worth, and you’ll most likely have joined the camp of people vilifying cryptocurrencies as evil.
Technical analysis neophytes
If you don’t like doing technical analysis or not versed in the art of TA, dollar cost averaging might be an smarter way to buy cryptocurrencies. Technical analysis is difficult, there are literarily hundreds of technical indicators with seemingly overwhelming names. If you don’t want to rack your brains trying to figure out what vortex Indicator, Bollinger Bands and the Fibonacci sequence means for your coins; simply use DCA every month and be done with it.
If you are buying cryptocurrencies in a long-term hodling strategy; there’s really no point in putting of your funds in the market all at once. Buying equal amounts of your target cryptocurrency over time can help you get maximum value out of your investment. In addition, not putting all your funds into a single purchase helps to steel your nerves against trading shocks if the market suddenly tanks soon after you buy the coins.
Dollar cost averaging will not necessarily make you a better investor overnight, you’ll still need to do the hard work of studying and understanding how the cryptocurrency market work. However, applying DCA can help beginners and long-term crypto investors optimize their cryptocurrency purchases to get the best value for their money.
More importantly, dollar cost averaging can help you avoid the emotional stress and panic attack that many people experience when the crypto market dips 10% or 20% overnight after they’ve unwittingly bought crypto at crest of a rally. Ultimately, dollar cost averaging is a nice strategy for reducing apprehension when investing in cryptocurrencies.