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Many investors find it difficult to know exactly when to buy or sell a cryptocurrency. Timing the market can be highly profitable, but it requires a great deal of patience and a deep understanding of Bitcoin’s market cycles. Even then, pinpointing the perfect moments to buy and sell remains a challenge.
For this reason, an old trading strategy from the stock market has trickled down into the crypto world. It’s called Dollar Cost Averaging (or Euro Cost Averaging for Europeans).
What is Dollar Cost Averaging? #
As mentioned, Dollar Cost Averaging (DCA) is a strategy that originated in the stock market. In the world of stocks, it’s also difficult to determine the best time to buy. Not all of us are as skilled as Warren Buffett, so investors seek a reliable approach. They have found this in the DCA strategy.
With DCA, you automatically invest a fixed amount of money at regular intervals (daily, weekly, monthly, etc.) to buy assets like stocks or cryptocurrencies. For example, you could invest €100 every month in stocks, so you don’t have to worry about price levels or chart strength. DCA simply means periodically investing the same amount in an asset.
The most popular cryptocurrency for DCA is Bitcoin. As the most stable asset in the entire list of cryptocurrencies, it’s a solid choice.
Why Use DCA? #
The goal of DCA is to achieve an average purchase price when buying an asset like Bitcoin. By investing at regular intervals, you sometimes buy at a high price, sometimes at a low, and sometimes at an average price. You won’t get an optimal purchase price every time, but you operate on the assumption of a higher price in the future, at which point your average purchase price will look favorable.
DCA has significant advantages. You don’t need to be a market expert or stare at charts all day; you simply keep making purchases for the same amount. Anyone can do it.
Another benefit is that you can’t make a major mistake with a single purchase. If you invest all your money at the wrong time, you’re in for a tough ride, and it could take a long time to see a profit. DCA prevents this.
Another aspect of this strategy is the elimination of emotions. Crypto trading can be very challenging, and emotions can lead to irrational decisions that decimate your capital. DCA is a very clear strategy that prevents this.
The beauty of DCA is that you build capital in a growing portfolio, almost without noticing. After all, you are investing money you can afford to lose, if you’re smart about it.
DCA Calculation Tool #
You can find calculation tools for this strategy in various places. A handy tool is available on Kraken’s website. You simply enter which coin you’re using for DCA, the start date, your investment amount per day/week/month, and it will neatly calculate the outcome. You can calculate back to 2020, so you can also see what your result would have been if you had done DCA in the past.
We ran a test, and the tool shows that DCA into Bitcoin has so far always been profitable. Bitcoin is also trading very high at the time of writing.
Disadvantages of DCA #
Because you buy at both high and low points, returns can be lower than if you had invested large sums at the perfect moments. Another drawback is deciding when to sell. You might plan to hold your coins for a long time, but eventually, you will have to sell. For this, you still need to choose a good moment. The DCA strategy is also not flexible; you can’t react to changing market conditions.
Another aspect is which cryptocurrencies to invest in. The most logical choices are the top two: Bitcoin and Ethereum. These assets have consistently held the top two spots since their inception, show the least volatility, and represent the strongest blockchains. You don’t want to be investing monthly in a coin that might fall out of the top 100 and lose its popularity in a few years.