7 min read

November 12, 2021

What is Dollar-Cost Averaging?

Everything you need to know about this strategy in both typical investments and as DCA applies to the cryptocurrency market.

If you’ve ever invested money, chances are you’ve come across the term “dollar-cost averaging”. Even if you don’t know the term, you probably know the idea: invest increments of money over time versus as a lump sum all at once. 

As such, your investments occur automatically regardless of the price of the asset you’re looking to purchase or of market fluctuations. In other words, for those who lack a formal investment background and education, dollar-cost averaging can help to maximize returns without needing to know or understand the “best” time to enter the market. 

The stock you want to buy may be at its lowest today and about to rise ten-fold tomorrow, but you have no idea of knowing that. So, using a method like dollar-cost averaging (DCA) can help to make gains. Although these will perhaps not be the highest gains, they’ll also not be the deepest losses.  

What is Dollar-Cost Averaging? An Introduction

As mentioned above, dollar-cost averaging is a method used to help reap the benefits of buying low and selling high, simply through automatic investments. Instead of taking a lump sum of money and putting it into the market during a time period that may yield a loss, dollar-cost averaging is recommended, especially if you have a sum of money — say ten thousand dollars — that you want invested. 

That being said, since most trading platforms charge a fee each time you make a transaction, you can incur more costs with a DCA strategy. Since this is a long-term strategy, though, these fees should be a very small percentage relative to your overall gains. 

Still, with DCA, you could miss out on a huge gain that you could have earned had you invested in a lump sum when the market was down.

Nevertheless, because the market is so volatile, DCA is best for risk-averse investors who, in the same vein, don’t want to incur massive losses if they timed the market incorrectly. Even professional investors can’t predict intraday or weekly movements of a stock or the market, so DCA is a safer way to take advantage of market dips. As such, if done correctly, a DCA strategy will lower your risk and perform better over a long-term horizon. 

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Is Dollar-Cost Averaging a Good Idea in Crypto? 

Given that cryptocurrencies are even more volatile than stocks, it would stand to reason that a dollar-cost averaging strategy would be just as successful when it comes to the cryptocurrency market. 

While stocks certainly experience intraday and weekly volatility, cryptocurrencies like Bitcoin can experience hourly price volatility. The volatility of Bitcoin and other cryptocurrencies have already made investing in cryptocurrency a “risky” bet given the unpredictability of the market. With prices fluctuating so rapidly, it’s tough to know when to buy and when to sell. 

Enter: dollar-cost averaging. If you believe that your asset will appreciate in value (that is, increase over time) but are also worried about price volatility, then a DCA strategy is best. With cryptocurrency especially, it can be effective to buy a little bit at a time versus investing a lump sum at a peak. 

The key is to choose an amount that’s affordable and invest regularly, even if the price of your asset, like Bitcoin, rises significantly. When you do this, you “average” out the cost of your purchases over time and reduce the impact of a sudden fall in prices, too. Even if the market slumps, a DCA strategy means that you will continue to buy, as scheduled, with the potential to earn even higher returns as prices climb back. 

One of the best ways to implement a dollar-cost averaging strategy in cryptocurrency is to have a percentage of your paycheck automatically deposited into cryptocurrency investments. With a platform like OnJuno, you can direct part of your wages into Bitcoin, Ethereum, or a basket of currencies in a simple, seamless manner. 

This way, part of your paycheck will be deposited into your checking account as fiat currency and another part as cryptocurrency, allowing you to easily implement a DCA strategy in a timely and scheduled manner. 

The Pros and Cons of a DCA Strategy

The main pro of a DCA strategy is that it can help an investor safely enter a new market, like the crypto market, and benefit from long-term price appreciation. It averages out the risk of downward price movements in the short-term and can offer more predictable returns than investing a lot of cash at once. 

Of course, DCA exposes investors to volatility given that prices change across time. But, if you believe that prices will slump only to recover in the long-term, even if you don’t know what that time period is, a DCA strategy can help you benefit if you’re right. Even if you are wrong, though, you will have investments in the market when prices do increase. 

A con of DCA, though, is emotional trading. If you’re a beginner, it can be easy to make decisions based on psychological factors like fear or excitement. 

A DCA strategy only works in the long-term horizon so if you want short-term gains then panic selling during a downturn or overbetting due to fear of missing out on potential growth won’t yield the results you want. The success of any DCA strategy is subject to what’s happening in the market so short-term gains are rare and almost impossible to predict. 

The Bottom Line

Ultimately, dollar-cost averaging is all about hedging your bets. While it restricts your potential upsides, it does so in an effort to mitigate possible losses. It’s a safer choice for most investors and allows you to reduce your chances of taking serious hits to your portfolio caused by short-term volatility. 

But, this strategy is only right for you if your unique investment circumstances allow for you to invest in the long-term. With DCA, short-term gains shouldn’t be an expectation. 


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Keertana Anandraj
Keertana Anandraj is a recent college grad living in San Francisco. When she isn’t conducting international macroeconomic research at her day job, you can find her in the spin room or planning her next adventure.

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