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What Is DCA In Crypto? Explained

Jul 25, 2024

What is DCA in Crypto?

DCA stands for dollar-cost-averaging. In crypto investing this strategy aims to average the price at which you are buying a specific cryptocurrency without factoring in the current market trends and reasoning (this helps investors to prevent emotionally-driven decisions).

Image source: The Motley Fool

Let’s use Bitcoin as an example. The approach is not hard to grasp: all you have to do is spend the same amount of money on BTC on a regular basis without taking in consideration the current price, the market trends, fundamentals, etc.

For instance, you can decide to buy $30 worth of BTC every Monday morning without taking care of the price. When the price is low, you end up buying more BTC. When the price is high you buy less. In a long-term perspective, you pay an averaged price per unit, probably saving more money than investors looking for better price opportunities.

Image source: Nasdaq

This trending strategy is also named “stacking your sats” where “sats” stands for satoshis, the minimum fraction of 1 BTC, one millionth of Bitcoin. The strategy mainly fits the “holders,” long-term investors who cut off all the volatility-related stress when choosing to grow their BTC mass steadily no matter what happens on the market.

How Does DCA Work?

DCA reduces the influence of short-term price fluctuations on the steady growth of a particular crypto in your portfolio. As your purchases take place in regular intervals, you may end up spending on crypto less than other investors as the averaged price may end up being better.

The reason is that finding a perfect time to enter or exit a crypto market is challenging even for seasoned crypto investors. You don’t lose too much when you purchase a bit in the uptrend as you do small but regular purchases of crypto, less than many investors. At the same time, some of your purchases will coincidentally be at excellent prices.

On top of that, you don’t spend your BTC but only gain it and benefit from its constant long-term growth. And you don’t spend time and energy on market monitoring and making informed decisions on when to buy BTC and what amount is optimal.

In general, this strategy is mostly considered good for beginners as they are less prepared to make correct internet decisions. DCA strategy makes them as efficient as some professionals without requiring them to understand the market mechanisms. Best professional investors, however, can outperform those who stick with dollar-cost-averaging.

How to DCA Crypto?

As the strategy is considered beginner-friendly, you can figure out the details such as the sum you will be spending on crypto and a time interval yourself.

See the steps one should take to apply a DCA strategy:

Set the time interval for your investments: The intervals are determined in line with the amounts the investor is able and eager to spend regularly. You can DCA your crypto investments using the daily, weekly, monthly, or other intervals. Some can buy crypto one every two weeks or two months.
Determine the amount of money you will regularly spend on investment: The amount of money spent per purchase is determined similarly – everything is individual, there is no universal formula.
Decide on the platform you’ll be buying crypto: First, you should decide whether you will be buying crypto each time manually or opt for using a regular automated investment. The latter option is available only on several platforms/apps. While choosing the platform pay attention to user feedback, availability of a platform in your location, and ensure that conditions of use (including fees and rates) are in line with your demands.
Launch your DCA operation: As you choose the platform, set the wallet and launch the regular purchase.
Take care of your investment: As you are accumulating crypto, make sure your funds are stored safely. Web3 Wallet by Freewallet can be a safe pick as a wallet to store your crypto stacks.

That’s it. The hardest task in it is deciding on services you will use for increasing and storing your crypto. If you pick the wrong interval or amount of crypto, you can change it easily any moment. Transferring crypto to a different wallet or withdrawing from an exchange can incur additional costs.

Pros & Cons

Like any other investment strategy DCA has its benefits and drawbacks. Before you decide to try this strategy or avoid it, take a look at the pros and cons of DCA in crypto.

Pros

This strategy is extremely simple and straightforward: DCA in crypto requires no expertise. Either it doesn’t require to make decisions after the process was set.

Flexibility: The strategy fits well people with any financial opportunities. Depending on your wealth and preferences you can invest more or less money but the order of actions will be the same. You can change the amount of money or the time interval any moment.

The strategy is stress-free: Instead of figuring out the right time to buy BTC, spending time on calculations that don’t guarantee you the best outcome, you just gain BTC little by little. You can ignore the market fluctuations altogether and just mind your own business.

Great potential: Even if you invest small sums, eventually time will turn this money into a significant amount. More than that, the gradual growth of the BTC price will contribute to faster growth of your portfolio value (especially if you invest in Bitcoin).

Cons

Bad timing: DCA doesn’t protect you from buying crypto when its price is too high. If you don’t pay attention to the market trends, you risk overpaying for your crypto.

Not for everyone: Although the DCA strategy is very democratic some people won’t find it comfortable spending money on crypto regularly at random prices.

Profit is not guaranteed: There is a probability that you will spend on crypto more than needed if you coincidentally buy in the uptrend too often.

Dollar Cost Averaging vs Lump Sum

According to a Swan Bitcoin research, generally lump sum strategy outperforms DCA, meaning that investors who watch the market and figure out the best timing to enter and exit the market, earn more than those who stick with DCA.

Image source: Medium

However, researchers point out that in the bear market, investors using the DCA strategy gain more than lump sum investors.

Conclusion

DCA in crypto is the investing strategy that requires no knowledge and market analysis. All you have to do is to decide on the amount of fiat money you are eager to spend on crypto regularly, set the time interval, and choose the right platform.

Using the DCA strategy you accumulate a specific cryptocurrency by buying larger amounts when the price is down and smaller amounts when the price is up. You don’t sell what you buy, hence your crypto portfolio is growing constantly.

This strategy saves you time as it doesn’t require market monitoring. However, it is considered that DCA works well in the bear market and not as good as lump sum in the bullish phases.

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