Dollar Cost Averaging in Crypto

Dollar cost averaging is a popular investing tool. So what is it, and how can it be applied to crypto investing?

Investing in cryptocurrencies can be a risky affair. The market is hugely volatile, meaning you could see your astronomical gains turn into astronomical losses overnight. So, it’s important to do your research and to understand the risks before investing in cryptocurrencies.

But if you are looking to invest, how can you minimise the risk?

The main issue with investing in cryptocurrencies is that it’s hard to predict what the assets will do. You might feel it’s a good time to buy Bitcoin because it’s crashed by a few thousand dollars. But often, it only goes and crashes further. However, one way investors aim to minimise risk is through dollar cost averaging.

Dollar cost investing can help spread out your investment, and minimise the risk of chucking all your capital in at once. So what exactly is it, and how can it help with your crypto investing? Canstar takes a look below.

Dollar Cost Averaging in Crypto

What is dollar cost averaging?

Dollar cost averaging (DCA) can be a great alternative to investing a lump sum. Instead of investing all of your capital in one go, the idea is that you invest smaller, fixed amounts on a regular basis over an extended period of time.

For example, instead of investing $6000 in one transaction, you could invest $1000 per month (or $250 a week/$500 every two weeks, etc) over six months. The price of the asset you’re buying may go up and down over that period, but you always invest the same amount.

Why do it?

Dollar cost averaging prevents you putting all your capital in at one price point. If you invest all your money, and the price of your assets falls, so does the value of your investment. With dollar cost averaging, you can help mitigate the significance of price fluctuations, as you buy the asset regardless of its price over several price points, some higher, some lower.

As the name suggests, DCA averages out the cost of your asset, meaning any losses (and gains) will average out, too, which helps mitigate the risk of investing.

How does dollar cost averaging work?

Let’s use the hypothetical “$6000 over six months” example – say an investor wants to put money in Coin X, but its price has been rather up and down lately. As a result, they’re unsure where the price will go from here, and don’t want to risk putting in all their capital at the risk of it falling.

The investor decides to make use of DCA over a six month period, investing $1000 every month regardless of the coin price. This is how it goes for the investor:

Month Investment Coin price ($) Coins purchased
1 $1000 8 125
2 $1000 5 200
3 $1000 4 250
4 $1000 2 500
5 $1000 3.33 300
6 $1000 6.66 150
$6000 invested Average coin price: $3.9344  Total coins bought: 1525

Rather than investing the entire $6000 in the first month and ending up with 750 coins, the investor using DCA staggered the investment over a period of six months – and because the coin price moved up and down during the period, ended up buying 1525 coins.

While the price of the coin dropped as low as $2 at one point, at the end of the six-month period the coin was worth $6.66, meaning that the portfolio of 1525 coins is worth $10,156.50.

If the investor had, instead, invested as a lump sum at the beginning of the period, the 750 coins would be worth $4995, meaning the investor would have made a loss on the investment.

Is there risk involved?

Of course, this strategy can go wrong.

The asset continues to fall

For starters, the price of the asset could continue to fall, and you could make a loss. The only benefit DCA would provide is your loss wouldn’t be as significant.

For example, If you invested the aforementioned $6000 all at once (750 coins), and the coin price fell from $8 to $1.20, your $6000 would be worth just $900… If you used DCA, however:

Month Investment Coin price ($) Coins purchased
1 $1000 8 125
2 $1000 5 200
3 $1000 4 250
4 $1000 2 500
5 $1000 1.6 625
6 $1000 1.2 900
$6000 invested Average coin price: $3.6333  Total coins bought: 2595

As you can see above, you’ve still lost money by DCA, but your portfolio is worth $3114 (2595 coins at $1.20 per coin), as opposed to the $900 it would be worth had you invested all your capital at the start.

The asset continues to rise

The other side of the coin (pardon the pun) is that the asset could continue to rise. If the asset’s value keeps going up, you may find the best price was the initial one. And had you invested all your money at the beginning, you would see the biggest gains. Keep in mind that had you used DCA, you would still have made a profit in this scenario. Just not as big a profit as you would have.

You can see an example of this below:

Month Investment Coin price ($) Coins purchased
1 $1000 8 125
2 $1000 10 100
3 $1000 16 62
4 $1000 13.245 75
5 $1000 20 50
6 $1000 15.62 64
$6000 invested Average coin price: $12.60  Total coins bought: 476

If the investor puts the full $6000 in their coin of choice at the start, by the end of the six-month period they would own 750 coins worth $11,715. But by using DCA over the same period, the investor ends up with 476 coins worth a total of $7,435.12.

How can dollar cost averaging help when investing in crypto?

Dollar cost averaging works best in volatile markets. And if you know even one thing about cryptocurrencies, it’s probably that they’re notoriously volatile. More so than probably any other asset on the planet.

If you’re confident that an asset will go nowhere but up, and the current price is the bottom price, or about as low as it will ever be, then you may want to invest the bulk of your capital at that price. But when a market is frequently going up and down (in the case of crypto, by huge amounts) it’s hard to know where that bottom is.

For example, late last year, Bitcoin’s value was around US$65,000 before it crashed by around US$20,000 in less than a month. It then rose slightly, crashed by another few thousand, rose again, crashed again, rose again, and then crashed again, sinking to a low of around $36,000.

As mentioned above, even for seasoned investors, finding that bottom price isn’t always easy.

DCA can, in some cases, take away the timing risk of trying to pick the bottom of a market. And it can possibly offer benefits in volatile or hard-to-predict markets, when investing a lump sum can be rather nerve-racking.

Learn more about cryptocurrencies here!

How can I use dollar cost averaging in crypto?

Dollar cost averaging, in principle, is not difficult to implement when investing in crypto. Decide how much capital you are willing to invest, and then decide the frequency and total time frame over which you want to invest that money.

Do note that there are fees every time you purchase cryptocurrency, and this should be factored into your investing strategy. If the fee is simply a percentage of the purchase price, then the amount invested doesn’t matter. Investing $100 a week will cost the same in fees as investing $200 every two weeks.

But if a fixed dollar amount fee is involved, it may pay to avoid more regular investments, ie. investing monthly instead of weekly. Check with your choice of crypto exchange for what fees are involved.

Is dollar cost averaging in crypto risk free?

Dollar cost averaging can help minimise risk. But, it doesn’t remove risk. As we mentioned above, the asset could continue to fall and you could lose your money.

A big crash doesn’t always mean a big surge is on the horizon. The crypto market is young and awash with thousands of coins and tokens of varying degrees of validity. It’s hard to know what is in store for the crypto market as a whole, let alone any particular cryptocurrency.

Where to buy Crypto in NZ

The display order does not reflect any ranking or rating by Canstar. The table does not include all providers in the market. 

Provider Fiat Currencies Bitcoin Other Currencies Est.
Easy Crypto NZD, AUD Yes 100+ 2018
Independent Reserve NZD, AUD, USA Yes 24 2013
Kiwi Coin NZD Yes No 2014
Swyftx NZD, AUD Yes 228 2017

This information is not an endorsement by Canstar of cryptocurrency or any specific provider. Canstar is providing factual information supplied by providers. Cryptocurrencies are speculative, complex and involve significant risks. Canstar is not providing a recommendation for your individual circumstances or in relation to any particular product or provider.

Learn more about cryptocurrency here

author andrew broadley

About the author of this page

This report was written by Canstar Content Producer, Andrew Broadley. Andrew is an experienced writer with a wide range of industry experience. Starting out, he cut his teeth working as a writer for print and online magazines, and he has worked in both journalism and editorial roles. His content has covered lifestyle and culture, marketing and, more recently, finance for Canstar.

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