How does DCA investment strategy work for cryptocurrencies?


Buying the dip is the mantra most BTC traders live by, thanks to the inherently volatile nature of the crypto market.

The real money comes not in the buying or the selling, but in the waiting – Charlie Munger

Munger may not have been talking about the crypto market, but the underlying philosophy holds true for the asset class. Crypto markets are made up of two types of investors – traders and HODLers. To many, the difference may not be evident, but their behaviour and approach to investments cannot be more disparate.

To a HODLer, short-term price fluctuations are insignificant, while traders have defined levels of risk.

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View Details »To a trader the ideal advice would be – if you’re losing money then end the trade at your defined stop-loss range, while for an investor the ideal advice would be to buy every dip and HODL. Traders hold assets until they reach short-term success while HODLers follow the buy-and-hold principle. HODLers invest their crypto for some years, decades, or even longer.

For most crypto traders, volatility is a fact of the market they’ve accepted and try to take advantage of. To counter the effects of volatility most investors look at dollar-cost averaging (DCA) as a viable buying strategy.

What this means
Rather than investing in a particular asset once, at a single buy price, with dollar-cost averaging one can spread the amount of money to invest and buy small quantities over a period of time at regular intervals. What this does is decrease the risk that one may face if the market prices drop.

With multiple buys and when the investment amount is divided across, one can maximize the odds of paying a lower average buy price over time. Additionally, dollar cost averaging allows you to get your money to work on a frequent basis, which is an important variable for long-term investment growth.

Say you plan to invest $1,200 in Bitcoin this year, you have two alternatives:

A) You can invest all of your money at one shot, or
B) You can invest $100 each month.

On paper, it may seem like choosing A or B would not make much of a difference. But, think about it. If you spread out your buys in $100 over 12 months, the odds of buying into the market at the right time are higher, and thereby more profitable.

DCA vs Buy-the-dip
Buying the dip is the mantra most BTC traders live by, thanks to the inherently volatile nature of the crypto market. When it comes to preferring one investment strategy over the other, DCA-ing your way through the market poses more advantages. This is mostly because you are investing a fixed amount periodically, allowing you more exposure to dips as opposed to tracking the markets and timing the dip. The fixed amount that you periodically invest also implies that you will likely end up buying more digital assets when the price is lower than when it is higher.

Of course, dollar-cost average is not without its risk. This would be the ideal strategy under the assumption that the underlying asset will only mature and grow in the future. This strategy is more apt for HODLers, who intend to hold the asset for years or decades.

Having said that, one particular downside to this approach is during an asset’s bull run.

Here, those who bought earlier will be more profitable. In this case, dollar-cost averaging will most likely have a negative impact on gains accrued during an uptrend. In such cases, lump-sum investing or buying the dip may outperform dollar-cost averaging.

Those retail investors who don’t have the access to large lumpsums can opt for DCA method to mitigate losses.

(The author is Co-Founder & CEO, Vauld. Views are his own)
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Updated: 05/20/2022 — 10:00