Dollar cost averaging is an investment strategy where an individual purchases a fixed amount of an asset such as a cryptocurrency at regular intervals over a period of time.
The key principle of dollar-cost averaging (DCA) is that by making consistent smaller purchases, investors may be able to buy more of an asset if prices fall and less of an asset if prices rise.
This helps to "average out the cost" of the acquired asset over time.
It also helps to reduce the significance of "timing the market" as investors are able to consistently accumulate an asset over time rather than acquiring a large lump sum at once.
With crypto dollar-cost averaging, an investor splits their investing capital into smaller increments and makes several purchases at multiple different prices over an extended period.
For some traders, dollar-cost averaging’s focus on time in the market may be a more suitable option than timing the market with a lump-sum investment.
By following a disciplined DCA strategy, investors have an opportunity to steadily build their crypto holdings over time with a more passive investing approach.
Ready to see how dollar cost averaging works? See how much value you would have today if you had dollar-cost averaged into different cryptocurrencies before.
Give it a try and see how powerful the DCA strategy can be.
Dollar-cost averaging offers an easy way for people to constantly build their crypto portfolio.
Kraken allows clients to set up recurring buys on hundreds of different cryptocurrencies, so they can always accumulate coins regardless of the market’s conditions.
Start dollar cost averaging by setting up recurring buys with Kraken today.
Some believe that using the dollar-cost averaging strategy to invest in cryptocurrency may help to:
- Smooth out volatility and minimize the impact of price fluctuations.
- Reduce emotions from the trading process.
- Avoid the impossible task of trying to buy at the “right” time.
Smooth out volatility
The dollar-cost average strategy may help some traders to better navigate the unpredictable terrain of the crypto market by spreading investments over time.
Remove emotions from trading
Emotional trading occurs when investors make decisions based on short-term market fluctuations or emotional reactions to news or events. This can lead to impulsive buying or selling decisions, often driven by two common emotions:
- Fear of missing out (FOMO).
- Fear, uncertainty, and doubt (FUD).
These emotions can sometimes cloud judgment and lead to poor investment decisions.
By using the dollar-cost averaging strategy, investors can set their emotions aside as they commit to regular, predetermined investments, regardless of market highs or lows.
No need to time the market
Market timing involves predicting the best times to buy and sell investments, but this approach is often unnecessary and risky. Accurately forecasting market movements is difficult, even for experts, due to unpredictable factors like economic events and investor sentiment. Frequent trades can also lead to higher fees, which may reduce potential gains and diminish overall returns.
While dollar-cost averaging cryptocurrencies can offer several benefits, it is not without its drawbacks.
- Lower returns: Some industry proponents assert that using the DCA strategy can result in lower-than-expected returns when compared to other trading systems, particularly if a majority of these recurring buys are executed in a rising market.
- Reduced flexibility: Investors who solely commit to buying a single cryptocurrency over a long period of time, rather than trading between multiple assets, may miss out on other potentially profitable opportunities that might not be possible to capture through DCA’ing.
You can use DCA to buy any of the 200+ cryptocurrencies supported by Kraken via Recurring Buys. Our crypto guides page can help, but be sure to review a range of sources.
There is no 'best' time to use DCA in crypto—it depends on your preferences and goals. Since DCA removes the need to time the market, you can follow the timeframe that works best for you. While it offers a way to navigate market fluctuations, its effectiveness depends on the direction of crypto prices.
