Trading cryptocurrencies is fundamentally different from investing in cryptocurrencies. Traders typically look for opportunities to buy coins at a low price and to sell the coins at a higher price. The duration of buying low and selling high then forms the basis of whether you are a day trader, swing trader, or scalper. Trading is at heart concerned with making as much profit as possible in response to price movements in the short term.
In contrast, investors are typically concerned about the long-term prospects and potential of their investments. Cryptocurrency investors believe that there’s a decent chance that cryptocurrencies will become the future of money. Hence, they are always looking for opportunities to accumulate coins before they attain mass-market adoption.
Many of the resources available on the cryptocurrency industry appear to be predominately focused on traders. This piece, however, is an explainer on Dollar Cost Averaging (DCA), a well-known long-term strategy for investors who wish to hedge themselves against volatile price moves while accumulating crypto.
What is Dollar-Cost Averaging?
Dollar-Cost Averaging (DCA) is a Wall Street term that has been carried over into the cryptocurrency industry as the deliberate purchase of a fixed dollar amount of cryptocurrencies at regular intervals irrespective of whether cryptocurrencies are trading up/down on the scheduled date.
If you commit to buying $10,000 worth of Bitcoin with DCA over the next one year – it would mean that you’ll buy about $833 worth of BTC every month, or $416 worth of BTC bi-weekly, or $208 worth of BTC every week for the next one year irrespective of the actual market price of Bitcoin on any of those specified days.
DCA sounds counterintuitive relative to the “buy low and sell high” methodology that you’ll find in cryptocurrency buying guides which are optimized for traders. However, if you are not a trader and do not plan to become a trader, it is a needless waste of mental resources hunting for crypto “lows.”
The chart above shows the historical price data of Bitcoin over the last month. You’ll notice that the Bitcoin had traded up from around $9604, all the way to $11,954 before it declined to $9,962 to form an interesting mix of days when you could have made a guaranteed profit or loss.
Here’s an Example of Dollar-Cost Averaging in Cryptocurrency
The screenshot below shows how your portfolio would have performed if you have committed to using Dollar Cost Averaging to purchase $100 worth of Bitcoin every week for the last three years. Over the last three years, you would have spent $15,700 buying BTC to accumulate 690,750,000 Satoshis or 6.907 BTC.
However, the total value of your positions would have been $57,086, marking an incredible 263.61% guaranteed profit within that period.
In contrast, if you had committed $15,700 as a lump sum for buying BTC three years ago, your account would have been worth more than $208K today. However, you could have lost close to 70% of the value of your portfolio during the 2018 bear crunch you might have rushed for the exits.
The more rational point to consider is that if you did not have $15,700 disposable funds to commit Bitcoin three years ago, a $100 weekly investment would still get you more than 200% in profits instead of waiting until forever to have a huge lump sum that you could invest.
The Best Way for Investors to Buy Cryptocurrencies
Long-term cryptocurrency investors are called “hodlers,” a variant of “hodling,” a term that became popular on bitcointalk.org in 2013. If you are an hodler, you’ll be subjecting yourself to unnecessary psychological and emotional trauma if you try to purchase cryptocurrencies with the same “buy-low, sell-high” strategy that traders use.
Unfortunately, most of the cryptocurrency exchange in the market are built for traders; hence, long term investors often must expend a great deal of effort to utilize Dollar Cost Averaging. Thankfully, Skrill, a London-based global company with offices in Europe and the U.S. has built a platform designed for long-term investors to buy and sell cryptocurrencies with DCA.
Skrill has established itself as a global provider of digital payments solutions since 2001, and it has annual revenues of $1.9B as part of the Paysafe Group. Last year, Skrill launched the cryptocurrency side of its business and the cryptocurrency business is gradually becoming a core business offering being built on its existing rails. Skrill is regulated by the FCA, and it is legally required to provide a reliable and trustworthy custodianship service that protects user funds.
Skrill allows the buying and selling of cryptocurrencies through its platform. All that a potential investor is required to do is to open an account and deposit funds to it. You can then go to the crypto tab on the platform to select the cryptocurrency that you want to purchase, decide the sum, and hit the purchase button. The trade is conducted instantly, and the cryptocurrencies are held in Skrill’s custodianship.
The best part is that Skrill has an inbuilt solution to enable Dollar Cost Averaging for buying cryptocurrencies through its automated orders. Users can set the price trigger at which they want to buy a cryptocurrency and the frequency at which they want to place such orders. Skrill’s intuitive algorithm then takes charge of the heavy lifting to execute the buy orders without requiring investors glued to a screen watching charts all day to buy or sell cryptocurrencies.
Dollar-Cost Averaging provides investors with many benefits, such as a stress-free accumulation of cryptocurrencies. DCA also makes it easy to move your crypto out of exchange into cold storage as soon as you buy because you don’t have to keep money on the exchange in search of the next dip. However, the fact that DCA typically takes a while to build your portfolio might increase the odds that you’ll be frustrated by FOMO every time the target crypto makes a sharp bull spike, and your position is not sizeable enough to record significant gains. Nonetheless, the sharp bull spikes will eventually alternate with sharp bear drops, and DCA will enable you to accumulate more coins at a discount.