How to Dollar-Cost Average (DCA) Into Cryptocurrency
Dollar-cost averaging (DCA) is a common investment strategy used to help individuals lower their exposure to risk and boost their portfolios over the long term. While we all know DCA works for fiat investing, can it also be applied to crypto?
In our opinion, DCA is the ideal way for non-professional investors to invest in crypto. It can help you grow your portfolio even if you don’t have much to invest up front. Keep reading to learn more.
What is Dollar-Cost Averaging?
Dollar-cost averaging is a basic investment strategy that involves investing the same amount into your portfolio at regular intervals. For example, $50 every time you hit payday.
This tactic helps to reduce the overall impact of a fluctuating market on your portfolio. Rather than trying to time the market, you simply continuously invest, hoping for long-term growth.
While dollar-cost averaging can have its ups and downs, it is generally considered to be a low-risk investment method because it doesn’t require much previous knowledge, nor does it require continual monitoring. Someone using DCA can set up auto-investments and simply check back in on their portfolio on a regular basis.
Can You Use Dollar-Cost Averaging to Invest in Crypto?
Absolutely! We believe that dollar-cost averaging is one of the easiest ways to start your journey with cryptocurrency. While you do need to do some initial research and ensure you choose the right options, it can be a passive way to grow your portfolio.
The important thing to remember when implementing DCA for your cryptocurrency portfolio is to ensure you aren’t investing in a scam token or coin. In fact, DCA only works when you choose a tried and true cryptocurrency to invest in at regular intervals. This is because only those with a proven track record will provide benefits long-term, even with small investments. Cryptocurrencies, which are newer, unproven, or possible scams, require constant monitoring, which isn’t conducive to the DCA model.
Some cryptocurrencies that work well with DCA are the following:
· Bitcoin
· Ethereum
· Solana
· Binance Coin
As you see, not only are all of these on the more expensive side, but they are also projects that have been around for several years. Already considered lower-risk investments on their own, these tokens are likely to at least remain stable, if not grow in use, making DCA an excellent tactic for investing in them.
How to Dollar-Cost Average With Crypto
Dollar-cost averaging is best implemented with a cryptocurrency purchasing app that lets you set regular, recurring investments and doesn’t require you to remember to invest. Examples include Coinbase, Robinhood, Kraken, and Binance. All of these will allow you to set up recurring investments into tokens/coins of your choice.
Even with DCA, we do recommend keeping a diverse portfolio. This means when you set up your portfolio, you should choose at least two tokens. We recommend that most new investors start with Bitcoin and Ethereum, as these two have the best track record and are the most likely to benefit your portfolio in the long run.
For example, say you plan to invest $50 each paycheck. You could allocate $25 to buying Bitcoin and $25 to buying Ethereum. While you will only be purchasing small amounts of each with every paycheck, over time your balance will grow, even if you sometimes purchase it at a lower price than others.
We also recommend that when choosing tokens, you choose at least one that you can stake, such as Ethereum. This will allow your money to work for you, even when you aren’t actively monitoring your portfolio. While the returns of staking are low at first, they will increase the more your portfolio grows.
How Long Should You Dollar-Cost Average Crypto?
In our opinion, you should continue a DCA strategy indefinitely, reviewing your purchase orders and investing strategy on an annual basis. This will allow you to make adjustments as needed, while also keeping investing stress-free. Remember, DCA is all about time in the market, so the longer you are able to let that cryptocurrency sit without using it, the better.
The Benefits of Dollar-Cost Averaging Crypto
· Less stress than day trading, swing trading, or similar investment tactics
· It’s easy for beginners to pick up.
· You can set it and forget it.
· Over time, your portfolio is likely to grow.
· You won’t waste time trying to “time” the market
The Downsides of Dollar Cost Averaging Crypto
· Results take time, and it can be hard to be patient
· You still need to check on your portfolio from time to time.
· A bad investment can be left to perpetuate without you realizing.
· Less flexibility than day-trading.
· Returns tend to be steady, but are often lower and less exciting.
· Using a platform can leave you susceptible to hacks.
How Do You Know Dollar-Cost Averaging is Right For You?
Generally, DCA is the best strategy for those who don’t know a lot about investing and have a low starting investment. While returns are generally lower in DCA, which is why experienced traders tend to choose a different strategy, they are better than trying to day-trade with just $50.
We also recommend DCA for those who are too busy to regularly monitor a portfolio. It really is a set-it and forget-it method which can make it ideal for those who have lots of other things going on in their life. Just make sure you set some sort of alarm to ensure you do check in from time to time. Otherwise, you could find yourself stuck on a platform that’s been hacked, or letting a bad investment perpetuate.
Remember, this is not official investing advice and you should run any questions by someone you trust before ever putting your money on the line.
Overall, if you don’t know much about finances, DCA is for you. Simply choose your platform of preference, and see how much you can afford to invest on a monthly basis. We recommend starting with at least $50 or $100 per month if you can. Then set up auto-investments so you can sit back and watch your cryptocurrency portfolio grow.
