What are the things to know about crypto dollar cost averaging strategy? In order to develop a Dollar Cost Averaging strategy and pull it off successfully, there are two specific things that you should surely do. These are:
- You should be a long-term bullish on cryptocurrency and invest on a regular basis and
- You must automate the DCA purchases.
This will ensure that there are no elements of emotions that may affect your trading and investing decisions.
For example, if you make a monthly DCA purchase of Bitcoin, your strategy should include the following:
- Spending the same amount in fiat currency to purchase Bitcoin each month and
- Buying the DCA share on the exactly the same day every month irrespective of the market movements.
When you stash your crypto coins in this way, you will get a much higher return than holding them. This is because you are making an investment in a market that is already long-term bullish.
And, if you want to have a large number of crypto coins in the long run you should do it with skull-splitting regularity. This will be much more productive than simple hodling.
In this article you will come to know how Dollar Cost Averaging helps in adding more value to your stock, the obvious and less obvious paybacks of it, and the specific crypto exchanges that will allow you to automate your crypto Dollar Cost Averaging strategy easily, and much more.
- Things to Know about Crypto Dollar Cost Averaging Strategy
- Dollar Cost Averaging Versus Hodling:
- The Working Process of DCA:
- Best Crypto Coins for Dollar Cost Averaging:
- When to DCA:
- Choosing an Exchange for Crypto Dollar Cost Averaging:
- The Process to Follow for Crypto Dollar Cost Averaging:
- The Benefits of Dollar Cost Averaging for Crypto Traders:
- Drawbacks and Viability of Dollar Cost Averaging:
- Calculation of Dollar Cost Averaging:
Things to Know about Crypto Dollar Cost Averaging Strategy
Dollar Cost Averaging is more commonly referred to as DCA in the crypto world.
It actually signifies investing a certain amount of money in a specific crypto coin irrespective of the price action.
These investments are usually done on a regular basis and in relatively smaller amounts. Check out Crypto Market Sentiment and Its Importance.
The main objective of the Crypto Dollar Cost Averaging strategy is to add more money to the crypto stash.
Here are a few things that you should essentially know when you wish to develop a crypto Dollar Cost Averaging strategy successfully, before you join the bandwagon.
Dollar Cost Averaging Versus Hodling:
The HODLERS of crypto coins however do not believe much in DCA strategy because they feel that it will not make much of a difference when a little bit is added to the stash every month.
It is needless to say that they are quite wrong in their approach and ultimately end up losing a fair bit of money over a specific time period.
The reason that Dollar Cost Averaging seems to be a much better option than holding will need you to crunch some numbers over a specific period of time for two specific reasons.
- This will enable you to know the net worth of your investments.
- You will also be able to set a more conservative and reasonable target for the upcoming bull cycle.
Ideally, the value of your stash will rise significantly as and when the price of the crypto coins rises.
This means that the crypto investors who did not have enough money in hand to buy thousands of Bitcoins in the beginning will see a lot of difference in their stash with the Dollar Cost Averaging strategy.
Idle holding of a stash will never produce the returns that a DCA would. The simple reason behind this is that it will offer much lower profits which is counterproductive and is also considered to be a long-term bullish bias.
All you have to do as a holder is to sit around and watch the price charts, hoping that it will go up, sometimes in vain.
If you have a high disposable income, then a crypto Dollar Cost Averaging strategy will be even more productive since you are already bullish and help you to move on with your life.
The Working Process of DCA:
Dollar Cost Averaging in crypto works in a pretty straightforward process. In this method you do not put all your money in a specific crypto coin all at once. Instead, you invest in it in smaller portions.
Ideally, when the price of a crypto coin goes down, as a result the average buy price also falls significantly. This means that you will be making much less potential profit.
This is because you will be left with less exposure in the market. This serves the main objective of investing in small portions which is to reduce the risks involved.
However, you must remember that this is a process to be followed if you have the patience to wait for a longer period of time to make profits on your investments.
Best Crypto Coins for Dollar Cost Averaging:
Now, you may ask whether you can follow the Dollar Cost averaging strategy by using all available crypto coins. The answer is: No. You will be better off if you do it with some of the major crypto coins.
Ideally, if you use any or every Altcoin for Dollar Cost Averaging, you stand a high chance to make just a marginal profit or even incur losses.
According to reports, more than 95% of the Altcoins may have more than 90% reduction in their value, which cannot be recovered even if by DCA.
Here are some of the crypto coins that you can easily use for Dollar Cost Averaging and expect to have high profits in the long run.
- Bitcoin – It is popular and everyone needs it. This specific coin is one of the best one to have a high potential, as it has shown in the previous Bull Run. Therefore make sure that at least 60% of your crypto portfolio, if not more, is of Bitcoin.
- Ethereum – This is the runner up in terms of potentiality and performance as well as in market cap. At least 25% of your crypto portfolio should be ETH because thousands of dApps run on this network.
- LINK – This is also a good performer as seen in the last Bull Run and is the exclusive one that went up in the bear market. At least 6% of your portfolio should have it.
- BNB – This Binance token of Binance, one of the most popular Centralized exchanges, offers a lot of features with an NFT marketplace launch coming up. It is good to have at least 4% of it in your portfolio.
- FTX: Expected to flip Binance within a couple of years in market cap, this is a more stable asset to have in your crypto portfolio. Include 5% of this coin to have a better gain.
There is one thing that you should take note of here. You should not DCA a lot of crypto projects at a time.
Though the crypto experts suggest doing it with only 4 of them, you may go with 5 crypto coins. The logic behind it is very simple and as under:
- One, too many coins will make your Dollar Cost Averaging quite a messy affair because you will need to do a lot of tracking in this aspect which will make things much more difficult for you.
- Two, too many coins in Dollar Cost Averaging will require a lot of funds while investing. Moreover, these investments need to be made in small fragments which may hinder in maximizing your profits and making the best out of the market corrections.
Since Dollar Cost Averaging is not meant for those traders who want to make quick profits, it is better to invest in a smaller number of crypto coins in a bear market and wait to make profit in the following bull market.
When to DCA:
Ideally, you can DCA any time, even when your crypto portfolio is down by over 50%. Here is what the experts have to say.
If you are Dollar Cost Averaging your BTC holdings, there is nothing to worry whether your portfolio is strong or 50% down. This is because Bitcoins usually have a very good price.
On the other hand, if you are an ETH holder, you should not worry about the time to DCA. Though the market may fall, it will not reach the bottom. However, if there is a sudden surge in the value, you will benefit a lot from it.
Therefore, when it comes to BTC and ETH, there is nothing to worry about if you want to DCA.
As for the other Altcoins, the experts suggest that you change at least half of your holdings into BTC, especially if these are new coins, and then do Dollar Cost Averaging.
If you are not too comfortable using your crypto holding for Dollar Cost Averaging, there is a good alternative as well.
You can easily DCA Bitcoin purchases by funneling your 401k account into a Bitcoin IRA.
The benefit of this method is that you will be setting aside a portion of your savings every month to amass Bitcoin and that to in an account with tax advantages.
Choosing an Exchange for Crypto Dollar Cost Averaging:
There are lots of crypto exchanges out there that will allow you to trade your crypto holdings by buying and selling them against a transaction fee.
However, if you wish to run a crypto Dollar Cost Averaging Strategy, you will not find many of them easily.
These exchanges should allow you to automate your trade which is the best way to avoid trading based on fear or greed.
Ideally, while choosing one of the best crypto exchanges for running a crypto Dollar Cost Averaging strategy you should make sure that:
- They automate the orders easily and effectively so that it is not only safe but is also fast
- They have a steady banking route so that your fiat money is safe when you change it into crypto while Dollar Cost Averaging and
- They are a legitimate exchange that follows a strict and well defined Know Your Customer and Anti Money Laundering policies.
As of now, you will find only Independent Reserve and Kraken fulfills all the above conditions, but do research for others that may such as:
- Swan Bitcoin
- CashApp and more.
However, check for the transaction fees because it can be really high as it is in case of CoinBase.
The Process to Follow for Crypto Dollar Cost Averaging:
When you select a crypto exchange to run your Dollar Cost Averaging strategy, you will need to follow the steps as under to start trading:
- Complete your KYC and fulfill the AML requirements
- Select a specific date to set up your monthly transaction from your bank account to the exchange.
When the money is deposited to the exchange, the Dollar Cost Averaging will be completed.
If you choose Independent Reserve, as for example, you will get to use an additional Auto Trader feature.
This feature will allow you to set up your crypto coin buying strategy based on a specific percentage of the balance in the exchange wallet.
This can however be done only once in a day and if there are no deposits made, there will be no trade.
The Benefits of Dollar Cost Averaging for Crypto Traders:
Ideally, being a human being, it will be quite hard to avoid greed and fear which is quite natural according to human psychology.
In order to avoid making a crypto trading decision based on your fear or greed, you must stay with your long term bias no matter whatever comes your way.
Following a Dollar Cost Averaging strategy is the best option and therefore you will need a compatible crypto exchange.
There are lots of benefits of following a crypto Dollar Cost Averaging strategy for the traders in the given market scenario.
Firstly, when you base your crypto trading strategy on technical analysis only then the current market condition that moves back and forth in ranging and slumping, you will be able to do your trades in low volumes only.
This is because in this market scenario the predictive power of technical analysis seems to be quite low. Simply put, the condition is not at all favorable due to the prominence of the stop hunts and wicks.
The next significant benefit of the Crypto Dollar Cost Averaging strategy is that you do not have to sit in front of the computer looking at the charts and signals to spot the entry points that will provide you with a very small amount of profit, if at all.
In most of the cases it is seen that traders who do not follow a crypto Dollar Cost Averaging strategy are often found burned out in anticipation of performing a more profit generating action due to the slow or no shift of the macro trend.
Ultimately, it comes down to the risks inherent in crypto trading. As you may know that there are lots of risks in this market and that is not only restricted to the volatility of the market.
The erratic price movements as well as the tendency to overtrade due to a wrong trading decision also play a significant role in increasing the inherent risks in making such trades.
There is no chance of overtrading when you DCA. And, since you are already long term bullish you will have very little or no risk of experiencing the Battered Bull Syndrome.
Therefore, when you DCA, there will be no ‘panic buying’ or ‘panic selling’ since there will be no guesswork involved in your trading strategy.
It is the best way to mitigate the short term effects of volatility in the price of crypto assets.
Drawbacks and Viability of Dollar Cost Averaging:
Just as it is for all other trading methods, crypto Dollar Cost Averaging strategy is also not devoid of its characteristic drawbacks.
- First, you will have to pay more fees for trading while following your Dollar Cost Averaging crypto strategy. This is because, you will make smaller yet multiple trades and every time to do so, the exchange will charge a specific fee. However, on the brighter side of it, this cost will be balanced by your potential gains over the years since Dollar Cost Averaging is essentially a long term investment strategy.
- Second, one of the most significant downsides of the DCA strategy is that you may miss out on the opportunity to make a substantial profit if you invested a lump sum on a crypto asset when its price was down. However, that would also need perfect timing for buying and selling the coin as well as an accurate price prediction for a day or a week.
Also, if you buy the crypto coin after a significant rise in its price, you may not be able to avoid facing a downward correction later on.
However, in spite of all its drawbacks, Dollar Cost Averaging strategy is quite a viable option to make potentially higher profits over a long time, especially if you buy during a dip and sell at a high.
It is a much safer option and in spite of its lower returns, overall this method will let you enjoy the maximum benefits from the market swings.
Therefore, consider Dollar Cost Averaging Strategy if you want to follow a safer method for somewhat guaranteed benefit from the volatility of the crypto market.
Calculation of Dollar Cost Averaging:
Finally, it comes to the potential earnings from the Crypto Dollar Cost Averaging Strategy.
The formula used to calculate Dollar Cost Averaging of your Bitcoin purchases is: (Total dollars invested) / (Total Bitcoin purchased).
However, it will not be easy to calculate the cost basis because it actually uses the same method to calculate capital gains, though there are some tools that may make it easier, but that is beyond the scope of this article.
Cryptocurrency is highly volatile but it allows you to make a lot of money within a short time, if the value does not fall at a rapid pace. Therefore, DCA is a good investment strategy for a long time reducing short term risks of market volatility.