Reduce risk and mitigate volatility in the market with dollar-cost averaging.
Getting involved in the cryptocurrency market comes with a variety of options — some high-risk, some low-risk. But one of the most effective strategies for building your portfolio is dollar-cost averaging (DCA) crypto.
In this article, you will learn everything you need to know to get started: how dollar-cost averaging works, its benefits and drawbacks, and the best practices that will help you make the most of this strategy.
Table of Contents
- What Is Dollar-Cost Averaging in Crypto?
- Benefits of DCA Crypto
- Drawbacks of DCA Crypto
- Prepare Before You DCA Crypto
What Is Dollar-Cost Averaging Crypto?
Dollar-cost averaging crypto (a.k.a. DCA crypto or, sometimes, Recurring Buys) is a strategy that involves spending equal amounts of money at regular intervals, regardless of how the cryptocurrency is performing at the time.
Because of market volatility, some crypto traders avoid trying to time the market. Instead of locking all of their money in an asset all at once (and therefore, at the same price point minus slippage), they use dollar-cost averaging (DCA).
Dollar-cost averaging allows investors to reduce the risk of timing their purchases by spreading out their entry points instead of spending a lump sum all at once.
What’s the benefit of this strategy? When you DCA crypto, you actively offset the negative impacts that occur as a result of short-term market volatility.
Other benefits include:
- Mitigating risk
- Avoiding emotion-based activity
- Capitalizing on downturns in the market
We’ll discuss these benefits in more detail later on.
A Simple Example
Dollar-cost averaging crypto may seem like a complicated strategy, but it’s easier than it sounds.
At its simplest, you decide how much you want to spend and then divide that lump sum into smaller increments that you can use to purchase crypto at regular intervals throughout a given time period.
For example, you may decide to spend $12,000 purchasing crypto over the course of a year. Rather than trying to time the market, you decide to make 12 purchases of $1,000 at a predetermined time each month.
Depending on the crypto you choose and the price at the time of purchase, you may get more or less of the digital asset than you expected. But the system tends to average out over a year or whatever period you chose.
In this example, dollar-cost averaging crypto is a useful strategy when you want to consistently buy cryptocurrency over time without having to constantly monitor the markets.
Benefits of DCA Crypto
1) It Keeps Your Emotions Out of It
One of the biggest benefits of dollar-cost averaging is that it removes your emotions from the equation.
It’s difficult enough to time the market for your benefit, but then you have to contend with the media you watch every day and how it influences your decisions.
With so many people broadcasting their strategies for success, it can be difficult to tune out the noise urging you to buy or sell.
When you set up a DCA system, it’s much easier to avoid the fear and anxiety that comes with buying and selling crypto. And, when you can look at the market objectively, you’ll be better prepared to maintain a steady strategy rather than succumbing to the herd mentality.
In many ways, then, this makes buying crypto easier because you’re spreading your purchases over a longer period of time and steadily increasing your holding rather than making irregular lump-sum transactions.
2) Reduces Risk
Digital asset markets can fluctuate wildly. If the market is down, holding onto a plummeting crypto that you are heavily invested in can be stressful.
Dollar-cost averaging aims to reduce this risk — and the stress that comes with it — by spreading exposure across multiple digital assets.
With this strategy, even if one crypto in your portfolio takes a steep dive, you’ve diversified enough to lower the overall risk.
That reduced risk even extends to the way DCA crypto helps even out your purchases. For example, when prices fall, you end up getting more crypto.
When prices rise, you end up getting less crypto, but you still end up getting the same average amount that you would have if you bought it all in one lump sum.
3) Removes the Need for Market Timing
Timing the market involves predicting which direction the cost of a crypto will go (i.e., up or down) and when this rise or fall will occur in order to maximize profit from buying and selling.
Such predictions are less about luck or casual observations and more about the intense analysis of data charts and technical readings. But this strategy is incredibly time-consuming and hard to get just right.
DCA, on the other hand, removes the need for this intense analysis and reduces the time spent trying to “time the market” to find the best entry point.
Drawbacks of DCA Crypto
1) It Can Come With More Fees
One of the main drawbacks of dollar-cost averaging is that it can come with more fees. Crypto platforms that offer scheduled recurring buys often charge a percentage per transaction.
These fees can quickly add up, take a big bite out of your wallet, and undermine the strategy you’ve worked so hard to maintain.
Depending on the platform you use, since you’re buying crypto more frequently, you may end up paying more fees than you would if you make one lump-sum purchase.
That’s why it’s important to research the crypto ecosystem you want to use before getting involved so you’re not overpaying to keep your dollar-cost averaging strategy going strong.
2) Lower Rewards
As we’ve mentioned, while dollar-cost averaging does come with some risk, it’s one of the lower-risk strategies out there. However, because there’s less risk involved, there’s often less reward.
With dollar-cost averaging, the returns are not as high as they would be in a lump-sum situation like putting everything you have into a single digital asset all at once.
For example, $6,000 spent on a single crypto purchase in January will result in longer market exposure than if the same $6,000 were spread out over a 12-month span.
You may also run the risk of missing out on high returns if the crypto you purchased rises progressively after you added it to your portfolio.
Similarly, sticking exclusively to a DCA approach may leave you out of the loop if you want to jump on advantageous shifts in the market.
Be sure to do your own research before buying a digital asset so you can minimize the risk and maximize the rewards.
3) Cash Drag
Cash drag is the length of time you hold funds that aren’t earning a return because they’re not in the market.
So, if your cash is just sitting there waiting for you to purchase crypto, it (the cash) can actually lose value over time due to inflation.
Many view this as just a way to take the same market risk later on for no reason. They see dollar-cost averaging as a vehicle that delays becoming fully invested without providing any additional benefits.
And, while that may be true in some cases, you can offset cash drag — and the higher fees and lower rewards mentioned earlier — by preparing ahead of time and adhering to several best practices.
Prepare Before You DCA Crypto
1) Analyze the Situation
Before pulling the trigger on a DCA crypto strategy, it’s important to analyze the situation.
- What risk level am I willing to tolerate?
- What is my skill level when it comes to buying and selling crypto?
- Do I have access to (or the ability to decipher) complicated technical analyses?
- Do I already have a good idea of when to enter a market?
- Is my portfolio better suited for some other strategy?
When you’ve answered these questions, you’ll be better prepared to jump into the crypto market.
2) Research Your Digital Asset
One common misconception of DCA crypto is that rewards are a sure thing. This couldn’t be further from the truth.
There are no guarantees when it comes to digital assets. That’s why it’s crucial to research the crypto you want to purchase.
3) Develop a DCA Crypto Strategy
After you’ve analyzed your situation and researched the digital asset you want to purchase, it’s time to develop a strategy.
Your strategy can be as simple or as complicated as you like as long as you have the means to execute it and are willing to stick to it through all the ups and downs.
For example, you might decide that you want to purchase $500 of crypto every month for the next year. You then decide that you want to divide that dollar amount among five different digital assets and spend $100 on each.
4) Choose the Right Crypto Platform
Choosing the right crypto platform, like Binance.US, makes it easier to dollar-cost average over the long run.
Of course, no two crypto ecosystems are the same, so it’s important to look for features that benefit your strategy the most, including:
- Multiple earning options, such as fixed deposits and trading
- Competitive rewards
- Advanced security features
- An extensive list of tokens and digital assets to choose from
- No hidden fees
Once you’ve found the right crypto platform, the rest is up to you.
5) Take Advantage of Automation
One of the best ways to DCA crypto is to take advantage of automation (sometimes called Recurring Buys).
Automating your dollar-cost averaging strategy allows you to purchase crypto according to whatever formula you choose (e.g., daily, weekly, twice a month, or monthly) without having to be present to initiate the transaction.
Just set the schedule that works for you and then check back in to monitor your progress.
Getting Started With Dollar-Cost Averaging
Dollar-cost averaging is a strategy well-suited for new and long-time investors alike. Both can benefit from the long-term growth opportunities that DCA crypto has to offer.
To decide if it’s the right option for you, take some time to:
- Consider your comfort level when it comes to risk and volatility
- Weigh the pros and cons
- Learn the best practices for averaging
At Binance.US, we offer the essential tools you’ll need to make the most of all your crypto strategies including making recurring purchases on a daily, weekly, bi-weekly, or monthly basis.
For more information, learn how to set up recurring buys on Binance.US and gain access to over 125 cryptocurrencies, low fees, and a user experience that streamlines and simplifies all your DCA crypto efforts.
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