Toward the end of 2021, cryptocurrency traders were flying high as the market hit all-time highs driven by strong interest among retail and institutional investors.
Fast forward one year, and that ecstatic sentiment is long gone, with the total crypto market cap dropping from $3 trillion to about $1 trillion as 2022 is coming to a close. A rapid decline in crypto prices has been driven by macroeconomic factors, including decades-high inflation and significant tightening of monetary conditions by major central banks, which has pushed investors away from risk assets.
Apart from their pockets, the raging volatility in the crypto market and rapid declines have also been toying with investors’ emotions, some of which have lost a fortune in just several months.
For this reason, many strategists advise investors to adapt their trading strategy to the current macroeconomic environment. In this aspect, dollar-cost averaging (DCA) is a trading strategy that does not require traders to spend as much time monitoring the crypto market – while also being merciful to their emotions.
DCA has been a popular approach for stock investors as it does not require any sophisticated tools. Most available apps for trading stocks are sufficient to carry out this particular investing strategy. So – could DCA be a good strategy for investing in crypto as well?
What is Dollar Cost Averaging?
DCA refers to a trading strategy involving buying and selling the same amount of an asset at regular intervals over a specific period. This trading method ignores short-term price changes, allowing investors to reduce the average cost per share and hedge against high market volatility, which is particularly evident in crypto markets.
DCA differs from lump sum investing, a separate strategy involving buying or selling an asset through a single transaction. Unlike DCA, lump sum investing demands investors to constantly monitor the market and buy assets at a potential low or sell them at a potential high. Instead, DCA isn’t very focused on timing the market but instead seeks to cut investment costs over the long run.
However, in crypto, DCА carries a slightly different meaning compared to investing in traditional assets. While the DCA can be employed for both buying and selling securities, Bitcoin investors typically don’t use it for selling but rather to accumulate the digital asset throughout regular intervals.
The Benefits of Dollar Cost Averaging
Above all, buying crypto using the dollar-cost averaging strategy can give investors peace of mind they could not have when trying to time the market. Again, the aim is to accumulate more crypto, particularly Bitcoin, if one buys it in a systematic manner, without getting concerned over price swings. Price drops allow DCA investors to purchase more Bitcoin for the same dollar amount.
This starkly contrasts with investors who bought a large number of Bitcoin near its peak in 2021, thinking it would continue to rise. But instead, the market volatility pushed crypto prices to multi-year lows, with many investors panicking and selling their Bitcoin holdings at $20,000 or $30,000, resulting in huge losses.
Equity investing analysis showed that those making poor trading decisions are mainly retail investors who monitor prices and trade frequently. The systematic approach behind the DCA allows stock and crypto investors to avoid having to constantly check prices and attempt to buy low and sell high.
The DCA strategy could be particularly beneficial for crypto investors who lack the experience and knowledge to identify the best moments to buy. Additionally, it’s also a proven method for long-term investors who do not want to check prices every couple of hours.
But above all, DCA could be especially useful in crypto trading given the market’s rampant volatility, where market timing is increasingly difficult. Remember, the main goal is to build wealth in the long run through systematic investments.
So is Now a Good Time to Dollar Cost Average into Crypto?
The answer to this question doesn’t only depend on the state of the market but also a particular investor’s trading experience and long-term goals.
DCA is likely more attractive to young investors who know their crypto holdings will increase in 10 or 20 years if they commit to this investing method. The ongoing crypto downturn shouldn’t be an issue as you’re betting on crypto’s long-term prospects. On the other hand, investing in crypto through DCA for older investors nearing retirement is probably not the best bet.
However, even if you find DCA appealing, you should only commit to it if you believe in the asset they are investing in. Otherwise, it does not make sense to invest hard-earned money each month over the following decade into a purchase they are not familiar with or don’t believe that it can produce returns in the long term. In other words, it is wise not to use the DCA approach unless an investor firmly believes in a particular asset’s value, importance, and potential for strong capital gains.
This is because investors are much more likely to sell their crypto holdings in panic during the next major bear run if they do not have profound convictions about their investments. Such panic selling is contrary to dollar cost averaging in the first place – it’s an investment strategy that aims to rid one of the stress and worry that comes with trading.
When it comes to picking the asset, some crypto enthusiasts believe that Bitcoin is still the only viable cryptocurrency for the DCA strategy. This is because they believe that Bitcoin is likely the only crypto asset thus far which has potentially strong longevity due to its fundamental use case.
While this is only an opinion of some, it is clear that DCA must be only used for tokens that are not likely to become worthless after a while. There are countless cryptocurrencies out there, so it is of utmost importance to do your own research before committing your savings to one of them.
In short, there’s never really a bad time for dollar cost averaging – what’s more, important is the investor having a firm conviction in the long-term prospects of what they are investing in. If the conviction is there, then the DCA strategy can help to eliminate the stress of trading and the burden of identifying the ‘top’ or ‘bottom.’
In an environment where Bitcoin prices remain highly exposed to the overall macroeconomic conditions, investors should seriously consider committing to the dollar-cost averaging approach as a means of investing in digital assets – should strong convictions be prevalent.
In this way, investors will save a lot of time from monitoring markets daily and protect them from the stress that stems from volatile markets. All that’s needed is a wallet for holding crypto and exchange to buy or sell the asset – be it a centralized or decentralized exchange. Yet perhaps most importantly, the DCA strategy can protect crypto investors from the common miscalculations of timing the market bottom, instead placing focus on the long-term prospects of select digital assets.
Guest post by Shane Neagle from The Tokenist
Shane has been an active supporter of the movement towards decentralized finance since 2015. He has written hundreds of articles related to developments surrounding digital securities – the integration of traditional financial securities and distributed ledger technology (DLT). He remains fascinated by the growing impact technology has on economics – and everyday life.