DCA in Crypto: By the Numbers and Why It Pays

Sep 11, 2023

Cryptocurrency is one of the most exciting and innovative forms of investment today, presenting a lucrative opportunity to grow your wealth. With so many different cryptocurrencies in the market today, a sound diversification strategy may help you enjoy excellent yields over time.

However, as much as investing in crypto can be profitable, it can also be volatile and unpredictable, making it daunting if you're new. Instead of risking timing the highs and lows of crypto fluctuations, why not adopt dollar-cost-averaging (DCA) - a tried-and-tested investment strategy that enables you to invest in crypto safely?

Welcome to DCA for cryptocurrencies, an article providing an overview of how DCA investment strategy works with crypto to help provide stable returns in the long run.

What is DCA?

In traditional finance, DCA is an investment strategy where you buy a fixed amount of an asset regularly, regardless of price fluctuations. Using DCA, you buy (say) $100 worth of bitcoin (BTC) weekly or $50 worth of ether (ETH) monthly.

Regardless of the frequency and amount, your core objective is to reduce the impact of market volatility on your investment and lower your average cost per unit over time.

DCA is rooted in the principle that it's impossible to time the market perfectly, and attempting to do so will trigger emotional stress and poor decision-making. By spreading your purchases over time, you avoid buying too much when the price is high or too little when the price is low. You also benefit from the power of compounding as your investment grows with each purchase.

What Is DCA in Crypto?

Crypto doesn't reinvent the DCA wheel and can be treated like any other asset class to execute a DCA investment strategy. The only difference is that instead of buying your usual stocks, bonds, or gold, you're buying cryptocurrencies with the money you invest.

Compared to traditional assets, crypto stands out for being decentralized and transparent. The power to manage your crypto is placed entirely in your hands, with no third-party intermediary in the picture to take control. You can also personally track and verify your transactions via a public ledger known as a blockchain.

Despite its benefits, crypto tends to be highly volatile and unpredictable, with external factors like shifting market sentiments and hacks capable of triggering dramatic price swings in short time frames. But crypto is still a powerful investment vehicle with the potential to drive significant returns - this is where DCA comes in as a suitable strategy to help you combat the risks and enjoy capital gains over time.

What Are the Pros and Cons of Using DCA in Crypto?

DCA minimizes market volatility risks and helps you lower your average cost per unit by consistently buying a fixed amount of crypto at regular intervals. Lower unit cost offers higher capital gains over time. It also means you don't need to monitor the market daily, reducing the risk of market timing and buying in at the wrong time.

However, DCA may not be the right strategy for you if you're a short-term trader or speculator wanting to capitalize on crypto's price fluctuations and volatility. DCA strategy doesn't guarantee profits or guard against losses - you must do your due diligence before committing to any cryptocurrency. Depending on the frequency of your purchases, you may also incur higher fees or taxes in accordance with your local laws and regulations.

How to Choose the Right DCA Strategy to Invest in Crypto

Before dollar cost averaging in crypto, you should calculate your DCA approach. Your DCA approach is often a personal choice based on your risk capital, personal goals, preferences, risk tolerance, and financial situation.

However, if you're starting, it's recommended to start small and scale up gradually as you gain more experience and confidence. Most importantly, you want to be consistent and patient, continuing your purchases throughout the highs and lows. Trusting the process is critical, giving it time to work and grow.

Be prepared to adjust your plan as needed. Your needs and even spending power can change with time. Be flexible and adapt to changing circumstances.

Finally, the age-old adage rings true: don't gather all your eggs in one basket. Diversify your portfolio and invest in various cryptocurrencies when you're ready. While we advise you to start with relatively stable and incumbent crypto like BTC and ETH, you may also want to spread your investments to include other coins when you're more familiar with the crypto industry.

How Do You Use DCA to Invest in Crypto?

You can start dollar cost averaging in crypto in four easy steps:

  • Choose the cryptocurrency you want to invest in. Thoroughly explore the fundamentals, technicals, and trends of different cryptocurrencies and make an informed decision based on your research. You can diversify your portfolio with various cryptocurrencies across other sectors and categories.
  • Decide on an amount you want to invest per interval. Like traditional asset investments, ensure this is an amount you can afford to lose and does not impact your financial goals or obligations.
  • Pick an interval you're comfortable with: daily, weekly, biweekly, monthly, quarterly, or yearly. As a general rule of thumb, the shorter your interval, the more frequent your purchases will be.
  • Select a platform to automate the crypto-buying process at your desired interval. Bake recently launched a Recurring Buys feature on its mobile app.

Examples of DCA in Crypto

To give you an idea of how DCA works to grow your crypto holdings and the potential returns on investment, let's explore some hypothetical examples of different strategies.*

*Disclaimer: The figures listed in these examples are hypothetical and intended for illustrative purposes. The asset prices you see are derived from price histories recorded on multiple sources, including Yahoo Finance and CoinMarketCap.

Example 1: Buying $100 worth of BTC every month for a year

Assuming you bought $100 worth of BTC every month for a year, starting from January 1st, 2021, here's what your DCA plan would look like:

From the above, using DCA would have bought a total of 0.028435 BTC costing $1,200 and valued at $1,383 as of December 1st, 2021. That's a profit of $183 or 15.25%. Your average cost per BTC would be $42,191, which is lower than the average price of BTC during the year ($44,722).

Example 2: Buying $50 worth of ETH every week for a year

If you choose to buy $50 worth of ETH every week for a year, starting from January 4th, 2021, here's how your DCA plan will develop:

Using DCA, you’d have bought a total of 1.0837 ETH for $2,600, worth $2,744.04 as of January 3, 2022. That’s a profit of $144.04 or 5.54%. Your average cost per ETH would be $1,813.29, which is lower than the average price of ETH during the year ($2,819.92).

Example 3: Buying a diversified portfolio of cryptocurrencies every month for a year

In this final example, assume you're buying a diversified portfolio of cryptocurrencies monthly for a year, starting from January 1st, 2021. You allocated your portfolio as follows:

  • 50% Bitcoin
  • 20% Ethereum
  • 10% Litecoin
  • 10% Cardano
  • 5% Chainlink
  • 5% Polkadot

You adopt a cadence of $200 every month and distribute it according to your portfolio allocation. Here’s what your DCA plan looks like:

With DCA, you'd have put together a diversified portfolio of cryptocurrencies for $2,400, worth $2,191 as of December 2nd, 2021. That's a loss of $209 or -8.7%. However, your portfolio would have performed better than buying BTC or litecoin (LTC) in the same period.

Use DCA to Invest in Crypto With the Bake Mobile App

Fortune favors the consistent, and it’s never been easier to start building your crypto empire with recurring buys on the Bake mobile app. Simply choose the recurring buys option to get started today.

DeFiChain (DFI) is the first cryptocurrency available for DCA on the Bake mobile app. More cryptocurrencies to be available in the future, so be sure to keep track of our latest updates.

By setting up recurring buys on the Bake mobile app, you enjoy:

  • Easy crypto purchases: All you need is your credit card to buy crypto - no need to jump through several hoops to buy crypto.
  • Zero transaction fees: You get to save money on every recurring buy.
  • Bonus rewards: Enjoy up to 11% of additional bonus with every recurring buy you make. If you’re a Bake ELITE member, you get an extra 1% on top of the existing bonus.

And that’s not all - from now until 01 November 2023 you can win a Tesla and a share of US$200,000 in prizes in Bake’s Baking Hot Summer Giveaway.”

Win tickets for every recurring buy you make and increase your chances of winning by inviting your friends to sign up for a Bake account. More than just tickets, you’ll also earn referral commissions for every successful sign-up.

DISCLAIMER: Please note that the information on this blog and in any articles posted on this blog is for general information only and should not be relied upon as financial advice. Cake Pte. Ltd., Cake DeFi, UAB, and its affiliates (the “Cake Group”) are not licensed financial advisers. You may wish to approach your own independent financial advisor before making any decision to buy, sell or hold any product and/or digital assets mentioned in this blog.

Any views, opinions, references, assertions of fact and/or other statements are not necessarily the views held by the Cake Group. The Cake Group disclaims any liability whatsoever that may arise out of or in connection with such statements. Always do your own research before investing in any financial assets and consult a qualified financial advisor if necessary.



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