> Blog > What is Dollar Cost Averaging in Crypto?

Published October 11, 2022

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Investing in cryptocurrency can take on many forms, with each having its own set of risks and rewards. From day trading to swing trading, there’s definitely no shortage of strategies that investors can use to try and maximize their returns. While there are plenty of ways to enter the market, dollar cost averaging (DCA) has proven itself to countless investors to be one of the most successful.

So, what exactly is DCA? This article will explore all the ins and outs of this increasingly popular investment strategy.

What is Dollar Cost Averaging in Crypto?

a demonstration of what dollar cost averaging is

Dollar cost averaging is a technique that can be used in any type of investment, but it’s often used in cryptocurrency due to the volatile nature of the markets. The basic idea behind DCA is to invest a fixed sum of money into an asset at regular intervals, effectively smoothing out the effects of volatility and mitigating some of the risk of investing in crypto.

For example, let’s say you want to invest $1,000 into bitcoin. Instead of buying all your coins at once, you could spread your purchase out over a period of time and buy $100 worth of bitcoin every week for 10 weeks.

The main benefit of this strategy is that it helps to smooth out market volatility while also keeping your emotions in check, preventing any hasty decision making. Since you’re buying into an asset at fixed intervals, you’re effectively buying more when the price is low and less when the price is high. Over time, this can help to average out your cost per coin and potentially increase your returns in the long run.

Dollar Cost Averaging vs. Trading Crypto

Dollar cost averaging and trading cryptocurrency are two of the most prominent market strategies, and they each come with some key differences that suit different market participants’ needs.

When you DCA into crypto, you’re buying into an asset at fixed intervals regardless of the price. This means that you could end up buying more of an asset when the price is down and less when the price is up.

When trading cryptocurrency, on the other hand, you’re trying to buy low and sell high. This means that you’ll only buy into an asset when the price is down and then sell when it starts to rebound.

The main benefit of trading is that it allows you to take advantage of market fluctuations and potentially maximize your returns. However, it also comes with a higher degree of risk since you’re attempting to time the market.

Dollar Cost Averaging vs. Value Averaging Strategies

Dollar cost averaging is often confused with value averaging, but there are some key differences between the two strategies.

As we mentioned above, with dollar cost averaging, you’re investing a fixed sum of money into an asset at regular intervals. Value averaging, on the other hand, involves investing more money in an asset when prices are low and less as prices rise.

This technique is designed to help you reach a specific target price for an asset over time.

Value averaging has grown in popularity in recent years due to the fact that it can help you take advantage of market fluctuations. However, it’s important to note that this strategy also comes with a higher degree of risk since you’re effectively timing the market in a similar fashion to trading.

Pros and Cons of Dollar Cost Averaging

Dollar cost averaging is a popular investment strategy, but it’s not without its risks. Here are some of the pros and cons of DCA to consider before you decide if it’s right for you.

Pros

Helps to smooth out the effects of volatility: Crypto’s volatility can easily lead to losses, so dollar cost averaging is a great way to help mitigate some of the risk of investing in these volatile digital assets.

Allows you to invest a fixed sum of money: Instead of trying to time the market or guess where the bottom is, a fixed, periodic investment promotes discipline to better train your investment habits and prevent you from overspending.

Reduces the risk of investing in crypto: Crypto is a volatile asset class and investing all at once can be risky. By investing in crypto through dollar cost averaging, you’re avoiding hasty decision making and stretching out buys over time.

Easy to implement: Dollar cost averaging is a relatively simple investment strategy to implement. All you need to do is invest a fixed sum of money into an asset at regular intervals. Popular cryptocurrency platforms like FTX have implemented features like ‘Recurring Buy‘ and ‘TWAP’ that make it easy to set up dollar cost averaging automatically.

Cons

You could miss out on opportunities: One of the biggest risks of dollar cost averaging is that you could miss out on opportunities. If the price rises too quickly, your profit margin will have been less than if you had invested more at lower prices.

This also means that you could end up buying an asset when the price is high and be forced to hold during prolonged market downswings. It’s important to remember that dollar cost averaging is a long-term investment strategy and is not meant to be used for short-term speculation.

It can take time to see results: Another downside of dollar cost averaging is that it can take a long time to see substantial returns. If you’re looking for quick gains, then dollar cost averaging might not be the right investment strategy for you.

It’s not guaranteed to work: While DCA can mitigate some volatility risk, there’s no guarantee that dollar cost averaging will work. Like any investment strategy, there’s always a risk that you could lose money.

Pros and cons of dollar cost averaging

Learning More About DCA

Dollar cost averaging is an increasingly popular strategy amongst cryptocurrency investors. FTT DAO likes FTX because their platform has implemented its very own DCA features on both the FTX App and FTX Pro, as well as countless other investment and trading strategies.

If you’re interested in learning more about how to invest in cryptocurrency, FTT DAO has a wide range of educational resources to help you along your journey. From crypto technical analysis to blockchain basics, be sure to check out the FTT DAO blog to learn more about this fascinating industry. You can follow FTT DAO on Twitter to stay up-to-date with the latest crypto news and developments, and subscribe to the FTT DAO YouTube channel for the latest educational content about the blockchain industry.

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