Dollar-cost averaging (DCA) is an investment strategy that consists in investing in an asset regularly. It is a popular solution for building up capital in the long term, while reducing risk: we’ll go into more detail in this article to see why and cover how to put it into practice.
How Does Dollar-Cost Averaging Work?
Instead of investing all of their capital in a single purchase (also known as lump-sum investing), a trader working with DCA in mind will make regular purchases on the market. This is meant to mitigate the impact of price volatility: you might think that you are buying the asset at the “best” time, when it’s cheap, only to see its value further drop. By investing periodically, without consideration of price at any given moment and at pre-specified intervals, you might be able to smooth out price hikes or drops. In the end, you will have bought the asset at an “average” value compared to the dollar – hence the name.
Can Dollar-Cost Averaging Be Applied to Crypto?
The short answer is: yes, absolutely. Applying DCA to cryptocurrencies means periodically investing fiat (dollars or euros) or stablecoins (such as Tether or TrueUSD) in crypto. This helps reduce the impacts of single-purchase drops and spreads cost over time.
You can implement DCA to many assets, on top of a variety of investment strategies. However, it is most suited to blue chip (i.e, well-established) coins such as BTC or ETH. In contrast, new altcoins with small market capitalization and little history can drop without ever recovering. DCA should be avoided for this type of asset.
Dollar-Cost Averaging in Practice
Let’s go deeper with a real-life example using Bitcoin (BTC).
Investor A invested 100$ on BTC on a weekly basis (DCA) from January 1, 2018 to July 19, 2022. That makes for a total investment of $23,800. Investor B spent the same amount ($23,800) on BTC in a single purchase, on January 1, 2018. That’s lump-sum investing.
Where do they stand in July 2022? The current value for Investor A (who used DCA) is $48,480, raking in $24,680. They made a +103.71% profit. Investor B’s value is $35,160, after a $11,360 gain: a +47.73% profit.
Why Use Dollar-Cost Averaging?
In the example above, Investor A clearly outperforms Investor B. Thanks to his (or her) regular investment, they could take part in Bitcoin’s price evolution while limiting risk. That’s the main objective of DCA: taking advantage of market downturns without risking too much capital in any given transaction.
Periodical investment helps offset short-term market volatility. And crypto is known for its volatility. That’s why DCA can be particularly effective when applied to crypto, as it allows to smooth average investment cost (even though DCA and lump-sum carry the same trading fees) and makes capital less sensitive to market drawdowns.
Dollar-Cost Averaging on HAL
Implementing a DCA strategy on HAL is simple. All you need to do is increase your trading budget manually at the frequency of your choice: weekly, bi-weekly, monthly… This way, the amount traded with our expert strategies will rise over time.
Reduce the impact of volatility by combining Dollar-Cost Averaging & HAL strategies developed by quants.
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Disclaimer:
Investing involves risk, including the possible loss of all the money you invest. In particular, crypto-assets are a highly volatile and speculative asset class. HAL is only suitable for traders who are willing to bear the risk of loss and experience sharp drawdowns. Past performance is not necessarily a guide to future performance.
The purpose of this material is to provide objective, educational and interesting commentary and analysis on developments in the crypto-assets sector. Nothing in this material should be interpreted as constituting an offer of (or any solicitation in connection with) any investment products or services by any member of the CoinShares Group where it may be illegal to do so. Access to any investment products or services of the CoinShares Group is in all cases subject to the applicable laws and regulations relating thereto.