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Dollar-cost averaging explained — building crypto investments over time with regular buys

2021.07.10 Rick Delaney

How to mitigate crypto's volatility risk and emotional decision-making using a tried-and-true investment strategy

Dollar-cost averaging is an incredibly effective but oft-overlooked investment strategy. It is a simple and easy way for investors, in both traditional and crypto markets, to build positions while minimizing risk and emotional responses to market volatility. 

Emotions, be they fear or overconfidence, can easily overwhelm the most experienced of traders and investors — especially in volatile markets such as crypto. For example, Bitcoin's price falling significantly over a short period should, in principle, represent an enticing opportunity for those with long-term conviction. However, uncertainty often pressures investors to make the exact opposite decision, and many sell at prices nearing potential bottoms. Similarly, when the price of Bitcoin surges, those who sold their holdings near the bottom may be enticed to buy in again, often at much higher valuations.

Dollar-cost averaging removes such emotional human decision-making from the investing process. Those following this strategy make buys at regular intervals rather than spontaneously based on market optimism and their emotional state.

In this article, we're focusing on the dollar-cost averaging strategy. You'll learn what it is, why it's popular and how to increase your chances of long-term profits by using it. Finally, we consider how to create and execute a basic dollar-cost averaging strategy here at OKEx.

Table of contents

What is dollar-cost averaging?

Dollar-cost averaging is a strategy that investors with a strong belief in an asset's future price appreciation can use to build a position over time. Rather than saving and investing a lump sum, those who employ a DCA scheme instead make many smaller purchases at regular intervals — irrespective of the asset's recent performance and latest price.

A simple example of "DCAing" would be if Maxwell, seeking a long-term BTC position with $1,000, set a schedule to buy $100 worth of BTC each week, irrespective of the price, instead of buying $1,000 worth of BTC at once.

Maxwell's strategy mitigates the risk of making a large investment at an inopportune time. Because his incremental buy orders are smaller than a lump-sum investment, declining prices shouldn't be as likely to prompt an emotional response. Instead, lower prices represent a more attractive entry point for Maxwell's next scheduled buy.   

Many retirement plans around the world use a form of dollar-cost averaging. For example, a 401(k) plan in the United States involves an individual allocating a portion of their paycheck to various investment vehicles at regular intervals, regardless of recent price action. 

Dollar-cost averaging is a powerful strategy and is popular among different investor types, including:

  • Beginner investors who might lack the technical chart-reading skills to time entries based on recent price action. 
  • Investors with strong, long-term conviction in an asset's future performance and appreciation. 
  • Those seeking to reduce the influence of emotions on their decision-making. 
  • Investors who have a set amount in terms of capital and want to maximize its effectiveness in a volatile market.
  • Investors who might not have access to a lump sum of capital to take a sizable position but have a regular income source — for example, from employment. 

Illustrating the power of dollar-cost averaging

Although it's an incredibly simple investment strategy, DCAing has consistently proved profitable in volatile markets like cryptocurrencies. The following examples should illustrate the power of dollar-cost averaging: 

Adam is bullish on BTC and has $1,200 with which to take a position. Unfortunately, he decides to enter the market on Dec. 20, 2017, just days after the bull market peak when BTC was trading at $16,462. Over the next 12 months, he watches his investment lose more than 65% of its total value. By Nov. 15, 2018, BTC's price is at $5,647 and Adam's position is worth around $420.

Olivia is also bullish on BTC, but for the long term, and has $1,200 to invest. Instead of taking a position with the whole $1,200, she chooses to dollar-cost average with monthly purchases of $100 for the next 12 months. Each month, she buys $100 worth of BTC — and as the price continues to drop, every subsequent purchase buys her a little more BTC than the previous buy. Rather than regretting her initial entry and praying for a speedy price reversal, Olivia may, in fact, hope for lower entry points to build a larger total investment. 

Over the same period, Olivia's overall investment is in a much stronger position than Adam's. Instead of facing $780 in unrealized losses, Olivia would be down just $343 if she sold, and she would benefit from an overall larger position. In addition, if the price reverses and begins climbing again, she would be in profit much quicker than Adam would be. 

Adam could only sell at a profit when the price once again exceeds his entry point. In BTC's case, that would occur in December 2020 — a whole three years after making his initial entry. It would take a lot of conviction on Adam's behalf for him to hold his BTC during such a prolonged bear market. 

Olivia, on the other hand, becomes profitable much quicker. Her average price would be the sum of each entry divided by the number of entries made. In the above example, Olivia's average entry price is around $8,065 — considerably less than Adam's $16,462 entry. As such, Olivia could sell her 0.1516 BTC for slightly more than the $1,200 invested as early as mid-2019.

The chart below visualizes this example, where the red and purple lines represent Adam's investment while the blue and green lines represent Olivia's.

A dollar-cost averaging strategy can significantly outperform a lump-sum investment and reduce potential emotional responses to market volatility. Source: Costavg.com

It's important to know that a dollar-cost averaging strategy does not guarantee greater profitability than lump-sum investing. For example, let's presume Adam was much less unlucky with his entry. Instead of buying the 2017 top, he bought just over 0.22 BTC for $1,200 on March 18, 2020, when the price was around $5,340. One year later, the price would be $47,858, and his investment would be worth more than $10,000. 

Meanwhile, presuming Olivia was dollar-cost averaging over that same period, her potential profit would end up being much smaller. As the BTC price rose throughout 2020, the amount of BTC she bought each month would shrink. After 12 months of DCAing, Olivia would have only 0.1076 BTC, which she could sell for a much smaller profit of $3,950. 

This second example probably makes dollar-cost averaging look like a much less appealing investment strategy. However, it's important to recognize just how difficult it would be to make the March 2020 lump-sum investment. BTC's price crashed from above $10,000 in February 2020 to well below $4,000 in mid-March. With just about every global market tanking, investing in such conditions would require absolute emotional detachment and unbreakable confidence in BTC's future price performance. In reality, few investors and traders, if any, are capable of timing the market with such conviction and accuracy. 

Cryptocurrencies like BTC are often highly volatile. It is not uncommon for the BTC price to increase or decrease by double-digit percentages over a short time. 

For traders, volatility represents an opportunity to profit. Leveraging various strategies, they attempt to exit a cryptocurrency position at a higher price than they entered it. However, for investors, volatility can be frustrating. Imagine you had saved hard to make a sizable investment in an asset only for its price to tank 40% or more over the following weeks. After watching a meaningful investment lose much of its value, it can be very tough to remain committed to your position, and thus many are tempted to sell at a loss. 

Dollar-cost averaging mitigates this risk. When spreading an investment out, the investor might still buy close to the local market top. However, they will also increase their position at more favorable entry points during subsequent periods of declining prices. 

Moreover, since DCAing uses time rather than price to determine when an investor buys an asset, it can be a much less labor-intensive investing method. There is no need to study price history charts to select an entry point. This makes dollar-cost averaging popular among novice investors, as well as those who might not have the time to commit to heavy market analysis. 

Finally, dollar-cost averaging is useful for those with a regular source of income. Perhaps they budgeted to have around $100 in spare cash at the end of every month. Rather than saving up and risking making a poor entry, a DCA strategy will average out their entry price over time. 

How to dollar-cost average at OKEx

It's very easy to dollar-cost average into BTC or other crypto assets here at OKEx. The following step-by-step guide should help you to get started with this popular investment strategy:

Step 1: Thoroughly research the cryptocurrency you're considering DCAing into

A strong understanding of what you're investing in will help you contextualize price drops and your long-term vision for the position. 

Step 2: Plan your dollar-cost averaging strategy

Think hard about the amount of money and how often you want to invest. You should be able to follow your plan consistently, so choose an appropriate amount and interval. For example, you might decide to invest $20 each week or $500 a month — it all depends on your appetite for risk and financial circumstances. 

Whatever you decide should then be followed. The point is to mitigate emotional responses to market moves when DCAing. What you consider an expensive entry today might turn out to be very cheap in a few months. Use the calendar on one of your devices to remind you to make your buys if you're likely to forget.  

Step 3: Register for an OKEx account 

Click Sign up at the top-right corner of the homepage and follow the on-screen prompts. You can also follow our step-by-step guide here

Step 4: Fund your account

Depending on the asset you're dollar-cost averaging into, you may be able to buy directly from our "Buy/Sell" section using a range of popular payment methods. You'll find that the largest cryptocurrencies by market capitalization are available in the "Buy/Sell" section. 

If you want to dollar-cost average into a more obscure crypto asset, you'll first need to buy BTC or USDT via the "Buy/Sell" page and head to the "Trade" section. 

Step 5: Make your purchase

In either the "Buy/Sell" or "Trade" section, buy the amount of the crypto asset you chose in step two. Then, just follow the instructions on the screen to complete your purchase.  

Step 6: Repeat!

Repeat steps four and five at the interval you decided in step two. For example, if you planned a $200 monthly buy, make sure you buy $200 worth of the asset on the same date every month — regardless of the recent price action. Again, you can use a calendar app to remind you when it's time to buy automatically. You could also preload your account with enough funds to complete multiple monthly buys into the future, which will save you both time and money on fees.      

Should I dollar-cost average into BTC?

Dollar-cost averaging is one of the least risky and most accessible methods of investing. If you're planning to hold an investment for a long period, DCAing is a very effective way to build a position without risking large amounts of capital all in one go. 

However, it's important to remember that any investment strategy carries some risk. For example, while dollar-cost averaging is an effective way to take a position in a market, you will still lose money if the asset's price never increases above your average entry price. It is therefore important to do your own research and due diligence before starting.

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Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.