The crypto community recently celebrated the 15-year anniversary of the release of the Bitcoin white paper, which Satoshi Nakamoto announced on the Cryptography Mailing List on October 31, 2008. The Bitcoin protocol was launched on 3 January 2009, and with it, a whole new alternative economy that is now worth over a trillion dollars.
Since it first debuted on the earliest exchanges, BTC has soared in value from a few cents to tens of thousands of dollars. Along the way, though, it has suffered sharp drawdowns – often rising by 20-100x in a bull market, but crashing by over 80% in a bear market.
There’s a saying that time in the market is what matters, not timing the market. Still, when the market is as volatile as crypto can be, it’s gut-wrenching to buy high and then lose 50% or more of your investment, even if you have confidence that the next bull market will come eventually.
Unfortunately, not everyone is a skilled trader who is adept at timing the market and picking the bottom as the right time to load up. That’s why dollar-cost averaging has become such a popular way to invest in crypto.
Dollar-cost averaging (DCA) is a popular strategy in which investors drip funds into the market at regular intervals, buying (or selling) a certain amount of crypto with a fixed amount of money each time. For example, you might buy $100 of BTC every Friday morning, or $500 on the last day of each month. This practice of slow, steady accumulation is known as ‘stacking sats’ (satoshis) in the crypto world.
The idea is to smooth out the price fluctuations and reduce the risk associated with deliberately trying to time the market. When the price of BTC is lower, you will buy more for the same amount of dollars. When it’s higher, you will buy less. As the market moves up and down, over the long run, these ups and downs are averaged out. So long as you keep buying, and the trend ultimately turns around and the price moves higher, you will be in profit as the asset recovers above your buy-in price.
If you have a high conviction that bitcoin is going to be around for the long term, but aren’t confident that you can time the lows, DCAing can be a good way to establish a sizeable position, while lowering your risk.
Benefits of DCA investing:
- Reducing risk. DCA buys don’t rely on trying to predict market highs or lows, or even overall trends.
- Taking the emotion out of trading. By sticking to a rigid schedule of buying the same dollar-equivalent amount at regular intervals, DCAing avoids the kind of mistakes that can arise from FOMO.
- Steady accumulation. Rather than putting everything into the market at once, DCAing encourages methodical and regular investing, building a lower-risk position in crypto.
While DCAing is a great way to get into crypto assets, which are notoriously volatile and unpredictable, there are trade-offs. By reducing risk, you also reduce the potential returns, since by definition you are not buying at the lows. It’s also not the best strategy in rapidly-rising markets, since you’ll be increasing your average price with every buy, potentially near a market top.
However, if the aim is to build a position over time after a major market top but before a parabolic rise, avoiding the risks of trying to time the market, and then enjoying the benefits of any future increase in price in the next major cycle, it could be a good approach.
The theory of DCAing is simple: buy a fixed dollar amount of crypto at the same interval. But there are a few questions you’ll still need to consider:
- Which crypto will you buy?
- How much will you spend each time?
- How regularly will you buy?
- How long should you continue your DCA buying?
There is no one-size-fits-all solution, since it will depend on your personal circumstances: how much crypto you already own, which coins, what disposable income you have, whether you plan to invest from a lump sum you have put aside or from your regular earnings, what stage you begin at in the market cycle, and so on.
For example, in an ideal world, you might start DCAing as the market crashes from an obvious bubble peak, and continue to invest as it bottoms out and consolidates over a period of a year or two, stopping as the price rises significantly above your average buy-in price – at which point, you might want to consider taking some profits.
The question of how often to make your purchases is an easier one. If the aim is to reduce risk, then the more frequent your buys, the better, since this smooths out volatility more. Buying a little every day is better than buying a lot once a month. If that’s too inconvenient, even once a week is better.
There is one exception to this, and that is if you are swapping stablecoins for crypto on a decentralised exchange (DEX). If you use a centralised exchange (CEX), then the trading fees are a fixed percentage, typically 0.1-0.25% of the amount traded. The total amount will always be the same, whether you make 10 purchases of $100 or 100 purchases of $10.
If you use a DEX, though, you will have to pay gas fees. These can vary a lot but will be the same regardless of how much you buy. Depending on which platform you use, that can be a problem. You could easily spend $10 for a DEX swap on Ethereum mainnet (and often much more), which makes buying $100 of crypto uneconomical. It doesn’t make sense to reduce risk by DCAing if you end up paying 5-10% in fees, so think about what platform you use carefully.
This is one time when regulated centralised exchanges like TimeX can offer distinct advantages. You can withdraw your crypto to an external wallet you control after you buy it.
To buy and sell bitcoin and other popular cryptos, register on TimeX.io. To find a freelancer or a job that pays in crypto, check out LaborX. To stake TIME, the native currency of the Chrono.Tech ecosystem, visit Timewarp.Finance.