Would you like to earn money on digital assets, but you don’t have time to sit in front of the screen? Have you ever wondered how to invest in cryptocurrencies automatically? The DCA (Dollar-Cost Averaging) strategy can help. In today’s article, we will explain what the DCA strategy is, how it works in crypto, what are its advantages and disadvantages, and how to apply it step by step (on the example of the Binance exchange). So, let’s get started!
What is a DCA (Dollar-Cost Averaging) strategy?
The DCA (Dollar-Cost Averaging) strategy is a method of regularly investing a certain amount of money at regular intervals, regardless of the current market value of the assets.
In the DCA strategy, the investor divides his investment budget into equal parts. Then he invests them at regular intervals (e.g. weekly, monthly, etc.) in a specific financial instrument (e.g. crypto, mutual fund, shares). Regardless of whether the value of an asset goes up or down at a given moment, the investor always invests the same amount. In this way, it reduces the risk associated with making a decision to enter a position at a given moment.
The DCA strategy allows investors to reduce the risk of investing at the wrong time and allows for the gradual building of an investment portfolio, which can lead to a better average performance in the long run. However, it is worth noting that the DCA strategy does not provide protection against losses and is not a guarantee of profit.
How to apply the DCA strategy? How to invest in crypto automatically?
The DCA strategy in crypto can be used on many cryptocurrency exchanges. We will use the Binance exchange in our example. Nevertheless, the process is very similar on other platforms, e.g. Bybit and KuCoin. So, to automatically invest in crypto using the DCA strategy, follow these steps:
Step 1: If you don’t have a Binance account yet, go to www.binance.com and complete the registration process. After creating an account, you need to verify your identity. Once everything is successful, log in to your account.
Step 2: Hover your mouse over “Buy Cryptocurrencies” in the top menu. Then select an option “Debit/Credit Card”.
Step 3: Choose an option “Cyclic Purchase”. Now decide which cryptocurrency you want to invest in automatically, select the fiat currency you want to charge your card and decide how often you would like to invest. When you set all the parameters, press “Continue” and choose a payment method.
Step 4: Binance will display your recurring purchase details. If everything is correct, click “Continue” and that’s it. From now on, you will automatically invest in crypto on Binance at regular intervals, which means you will follow the DCA strategy.
DCA in crypto – Advantages and disadvantages
The DCA strategy can be useful in crypto trading for several reasons:
- Risk reduction: The cryptocurrency market is very volatile. Investing a large amount of money at one time can lead to large losses. Cryptocurrency prices can go up very quickly, but they can go down just as fast. The introduction of the DCA strategy allows you to invest a regular amount of money at certain intervals, which reduces the investment risk.
- Avoiding emotions: Cryptocurrency trading can be very emotional. Making decisions based on emotions can lead to mistakes. The DCA strategy allows you to invest in a more rational and systematic way.
- Long-term goal: the DCA strategy is best for long-term investments, which means it is ideal for people who want to invest in cryptocurrencies for the long term and have no intention of speculating in the short term.
- Average purchase price: investing a regular amount in cryptocurrencies at different times allows you to reduce the average purchase price, as prices can be higher in some periods and lower in others.
Nevertheless, the use of the DCA strategy in crypto also has its disadvantages:
- Possible losses in the short term: While the DCA strategy is a good way to invest in cryptocurrencies in the long run, it can lead to short-term losses. This is because an investor can buy cryptocurrencies when their price is high.
- Profit Delay: In the event that the price of the cryptocurrency is growing rapidly and the investor uses the DCA strategy, the profit may only appear with a delay. Why? Because he buys fewer units at higher prices.
- Lack of flexibility: The DCA strategy requires constant deposits into your trading account at set intervals. This can lead to inflexibility when an investor wants to reduce or increase their investments depending on the situation in the cryptocurrency market.
In conclusion, the DCA strategy has many advantages, such as reducing investment risk, reducing the influence of emotions on investment decisions, average purchase price and long-term goal. However, the disadvantages of the DCA strategy include possible short-term losses, profit lag, and inflexibility.
DCA on bitcoin – a practical example
Suppose an investor has an investment budget of $10,000 and wants to invest in bitcoin using the DCA strategy for a period of 10 months. To do this, he divides his funds into 10 equal parts of $1,000 and invests each month.
For the first month, the investor buys 0.02 bitcoin for 1000 USD. With an assumed price of $50,000 for 1 BTC, it gives him a total of 1 BTC.
In the second month, the price of bitcoin increases to $60,000 for 1 BTC. The investor only buys 0.0167 BTC for $1,000 this month because the price has gone up. In total, the investor now owns 1.0167 BTC.
In the third month, the price of Bitcoin drops to $40,000 for 1 BTC. An investor buys 0.025 BTC for $1,000 this month because the price has fallen. In total, he now has 1.0417 BTC in his wallet.
The investor continues this strategy for the next 7 months, respectively buying more bitcoin when the price goes down and less when the price goes up.
After 10 months, the investor has invested a total of USD 10,000 and has 1,727 BTC in his portfolio. This means that the average BTC purchase price is around $5,790 for 1 BTC.
Thanks to the DCA strategy, the investor bought bitcoin at different prices and for different amounts, which allowed him to lower the average purchase price and reduce investment risk.
The DCA (Dollar Cost Averaging) strategy in cryptocurrencies allows you to reduce investment risk by avoiding buying at the top of the market. What’s more, it allows you to get rid of emotions when trading crypto. And while DCA has many advantages, it also has disadvantages. It does not give us the necessary flexibility, and what is more, it may turn out to be unprofitable in the short term.