Crypto investing is all about timing. Particularly when to buy and when to sell. But when you’re looking to purchase specific assets like BTC or ETH, volatility is a major concern in determining how much of a mark down you can stomach if and when the price declines. Since values are volatile, investors are constantly in search of ways to gain exposure to the market without having to predict the future.

The reality is that timing the market rarely works out. Even experienced investors cannot predict tops and bottoms. Human psychology often drives us to buy when prices go up in hopes of a continued rise, only to see them crash back down and vice versa to sell assets when prices decline in fear of incurring a continued loss, often to miss out on a rebound.

But there’s an alternative approach adopted by many, called dollar cost averaging (DCAing). Instead of worrying over the accuracy of your price predictions, you can set up a regular contribution plan. Dollar cost averaging works by investing a certain amount of money regularly, like once a month or once a week. The key is to stay consistent by having regular buy or sell orders entered and filled at periodic intervals, thereby achieving the average price over a desired timeframe.

Dollar cost averaging is a steadier and more disciplined way of building your crypto portfolio over time, eliminating guessing games, eliminating the emotional factor. Since you’re buying or selling at regular intervals, no one day or one point in time decision is required. You still have the freedom to buy more when prices are low and less when prices are high; and in the long run, provided the market direction you chose is correct, you can come out ahead even if the market is bouncing all over the map.

How does this work in real life?

Let’s look at a real-life example and compare two digital asset users - John and Katie - who both deployed $5,000 in Bitcoin in January of 2022. John decided to allocate the whole sum on January 1, 2022, when the price of Bitcoin was $47,800 (according to Dollar Cost Averaging Bitcoin - dcabtc.com). This means he owns 0.104 BTC.

Katie, on the other hand, decides to deploy her $5,000 in equal amounts every month for the entire year, which equals about $416 per month. At the end of the year, she finds herself with 0.19 BTC - nearly twice as much as John - simply because she did not deploy all her money at the same time and was able to capture BTC at different prices throughout the 12-month period (all figures sourced from dcabtc.com).

Not only did Katie come out ahead of John in the amount and dollar value of BTC she owns, but she saved herself time and stress trying to get a perfect entry price for her lump sum. Katie also systematized her investment strategy over time, leaving less to chance and minimizing the impact of market swings.

(this example is intended for illustration purposes only, it is possible that a single purchase of an asset may result in a more favorable average total purchase or sell price than an equivalent DCA strategy)

This handy graph shows Bitcoin prices between Nov 30, 2020, and December 1, 2023. It is easy to see that putting a lump sum into the digital currency at the beginning of this cycle would mean losing out on the cheaper entry points throughout the period. Trying to predict these cheap entry points, however, is a tricky and risky strategy.

Source: https://www.coindesk.com/

Advantages of dollar cost averaging

Dollar-cost averaging has a number of benefits. Firstly, as we have mentioned, finding the right entry point is typically beyond even the most experienced of investors, because markets are hard to predict.

Secondly, this approach removes the emotional element from money management. Behavioral finance theory stipulates that there are many biases to which we as humans are susceptible when it comes to our own wealth, including overconfidence and chasing trends. These biases can distort our understanding of how the market functions and drive us to get in at the worst of times, which can be avoided through dollar cost averaging.

Thirdly, the dollar cost averaging approach makes wealth strategies widely available to a larger demographic. Many of us don’t have thousands of dollars to deploy in digital assets straight away, but over months or even years, it is possible to build a significant holding and smooth out the tops and bottoms of the market.

Allocating smaller amounts at regular intervals rather than going all in straight away affords room to react to any adverse or extreme price movements should they occur, which can be often in the crypto asset class. For example, it would have made it possible to take advantage of the recent crash in the price of Bitcoin, which fell from its all-time high of $65,000 in November 2021 to trade below $17,000 in November 2022. Since then, BTC has gradually rebounded to its price of $43,000 at the time of writing after a 10% flash crash. Allocating some additional funds near the bottom of this trough if one has conviction, could have helped mitigate mark downs or unrealized losses incurred from allocations made near the peak in November.

Different scenarios

The dollar cost averaging, or “recurring buy” strategy is an unemotional and steady way to accumulate or dispose of your assets. However, its efficiency still does depend on the market conditions we find ourselves in. Let’s look at an example of buying $40,000 worth of a $50 token, netting 800 tokens (all figures are sourced from nerdwallet.com). The chart below shows the profit or loss on each trade if the price goes up or down.

In a falling market, the dollar cost averaging strategy truly shines. Let’s say the $40,000 was split equally among four purchases ($10,000 each) at token prices of $50, $40, $30 and $25 over the course of a year. In total, this would buy 1,183.3 tokens and the table below shows the profit/loss at different sell prices.

Profit/loss in a falling market

In a flat market, where prices are mostly going sideways, the profit/loss scenario would look very similar to a lump sum allocation. However, there is always the possibility that prices will fluctuate significantly and this strategy is poised to take advantage if this happens.

In a rising market, dollar cost averaging looks less attractive. Let’s assume we’re spending $40,000 in four installments on tokens priced $50, $65, $70 and $80, respectively. This would result in the purchase of 621.65 tokens and, as prices fall, the payoff profile looks less favorable.

Profit/loss in a rising market

However, keep in mind that for long-term wealth accumulation strategies, this scenario - i.e. a consistently rising market - will not last indefinitely. In the world of cryptocurrencies, prices can fluctuate significantly in a matter of days, so trying to capture the upside in a bull market is a short-term and high risk strategy. For those wanting to hold crypto for a longer time, a dollar cost averaging strategy provides a potentially less stressful alternative.

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