Dollar-cost averaging takes the guesswork out of crypto purchase timing by automatically buying more when prices are low and buying less when values rise. Several crypto exchanges now offer auto-buy, a tool to leverage dollar cost averaging to build your crypto portfolio.

What Is A Recurring Buy On A Crypto Exchange?

Recurring buys, sometimes called auto-buy, is just a plain English term for dollar cost averaging. For instance, to build a position in Bitcoin, you can set up an automatic purchase amount that fits your budget, putting your Bitcoin purchases on autopilot.

It’s difficult to get market timing right every time when building a position. Emotion can play a role as well, particularly in the volatile crypto space, leading to trades we might later regret. Recurring buys solve both of these problems by removing you from direct trading. Instead, you choose an asset, an amount you want to invest, and an investment frequency. The exchange takes care of the rest, automatically buying on a recurring schedule you’ve selected.

The result of dollar cost averaging through a crypto exchange is that your average cost will fall when the market prices fall, and vice versa. Consistent auto-buys ensure that your average cost follows the market trend, a feat few investors can accomplish without the discipline of dollar cost averaging.

Not all exchanges offer recurring purchases or even automatic deposits. We selected five top picks that make building a position easier through dollar cost averaging.

Why Is Dollar Cost Averaging A Good Strategy For Crypto?

It’s easy to sing the praises of DCA, but is the strategy really better for crypto? In more than one study, including Vanguard’s oft-cited study and another from the CFA Institute, immediate lump sum investments outperformed DCA strategies over time.

In other words, if you invested $1,200 all at once, the investment typically outperforms 12 monthly purchases for $100 each. In fairness, DCA studies often focus on stocks. We found a very different pattern when looking at Bitcoin DCA performance, detailed in a later section.

Generally speaking, however, an immediate investment can outperform because it gains in value while a DCA investment is waiting for the next scheduled buy.

Lump sum investing beats DCA in many cases, but that headline misses the big picture. It also ignores cases where DCA saves investors from losing money in more volatile markets.

In other words, DCA may provide a better hedge against downside risk rather than outperform in gains.

If you invest your $1200 all at once and the market immediately drops, you’re stuck with your entry price. On the other hand, DCA allows you to deploy capital gradually, providing a lower average cost if prices trend downward.

Think of DCA as a risk reduction strategy that insures against an imperfect timed entry. In a volatile market like crypto investing, many investors might welcome the added safety. Dollar cost averaging also removes the guesswork of market timing, a trading technique that’s notoriously difficult to get right.

Some of the largest advantages of DCA revolve around volatility and bear markets, but dollar cost averaging also adds discipline to your investment strategy, ensuring that you’re always building toward your goal.

Benefits Of DCA’ing Crypto

• Ensure Consistent Investing. Using a DCA buying strategy ensures you are always investing.
• Smooth Price Peaks And Valleys. Lump sum investments lock in a price, like strapping yourself in for a rollercoaster ride. DCA, however, smooths out the ups and downs by reading buying power when prices are loftier.
• Remove Emotion From The Investment Equation. When prices are volatile, investors can make hasty decisions, possibly buying or selling at inopportune times. DCA removes the fear of missing out (FOMO) and the fear of losing money from the equation.
• Protect Against Downward Price Trends. Lump sum buys offer no protection against drops in price immediately following your buy. DCA simply buys more at a lower price, bringing down your average cost.

Dollar cost averaging offers advantages, but in markets where prices are rising, the end result of DCA is a higher average cost compared to an immediate investment. Fortunately, if you continue to DCA, your average cost trendline will flatten over time.

Dollar Cost Averaging Crypto Calculator

When you set up a recurring buy-to-dollar cost average for your investment, you aren’t just smoothing out your cost chart. The strategy also keeps you moving toward a goal without interruption. Even small buys, done with consistency, can grow your portfolio significantly.

We can use Bitcoin historical prices to see how different investment amounts add up over time.

Let’s say you decided to invest in Bitcoin on 1/1/2018, when the price of one Bitcoin was $13,444.88. Looking at your budget, you feel comfortable investing $2,000 annually.

The table below indicates values through the last investment made in each year.

(source: https://dcabtc.com/)

To compare, if you had purchased $8,000 in Bitcoin as a lump sum purchase on 1/1/2018, the value 4 years later (1/1/2022) would have been $27,645.

The other interesting pattern to notice is that during downturns, more frequent purchases protected gains better due to a lower average cost. However, monthly purchases outperformed more frequent purchases when Bitcoin moved up rapidly.

Dollar Cost Averaging Crypto Example

One of the biggest advantages of dollar cost averaging is protecting against market volatility, and in the crypto space that cautious approach can translate into larger gains in some cases.

Let’s work with some historical values for Bitcoin.

Five years prior to this writing, Bitcoin closed at $7,363.80. If you had purchased one Bitcoin on that date, it’d be worth $20,752.90 today.

However, dollar cost averaging over the same five-year period would have outperformed the lump sum investment of $7,363.80.

Here are the numbers.

If you took the $7363.80 investment and broke it down monthly ($123 monthly), your investment would be worth $28,361 based on today’s BTC price.

$7363.80 / 60 months = 122.73 (~$123)

Breaking the amount down to bite-sized weekly recurring buys, you would have seen an even larger gain. By investing $28 weekly, your investment would be worth $28,271 after five years.

$7363.80 / 5 years = $1,472.76 | $1,472.76 / 52 weeks = $28.32 (~$28)

Performance varies based on the time frame you compare, however. One main takeaway is that dollar cost averaging is most beneficial when prices are falling or the asset you’re buying sees frequent volatility.

DCA Crypto Strategy

We each have our own investment goals. Consider your priorities and budget before investing.

• Choose Your Assets Carefully. There are over 20,000 cryptocurrencies, most of which face a challenging future. DCA won’t help if the asset goes to zero. Also, research trading volume. If you need to exit a position, you’ll need buyers.
• Consider Your Risk Tolerance. More frequent purchases limit volatility’s effect on your portfolio, reducing risk, but can also slow performance when trends are bullish.
• Consider Your Budget. Cryptocurrencies are risky business. Don’t invest more than you can afford to lose. But also weigh crypto against other assets you hold. Choose an appropriate allocation.
• Think About Your Exit Strategy. It’s always best to know your exit plan beforehand. Your asset allocation strategy plays a big role in knowing when you’ve bought enough and when it might be time to reallocate.

It can be safer to start small as well, building slowly until you can study the effects of trading costs and develop a stronger sense of long-term opportunity.

To Sum It Up

Dollar cost averaging offers several benefits, bringing discipline to your investments and smoothing market volatility. But one of the biggest advantages is seen during market instability. A DCA strategy allows you to capitalize on market swoons by purchasing more of your chosen cryptocurrency when prices are lower.

Now, investors can select an exchange that matches their investment goals by offering the right combination of assets, purchase intervals, and fee structure.

Frequently Asked Questions