You know the pain you feel when the market crashes just after you’ve invested all your money into it? Hi friend — we’ve all been there. It’s precisely that situation (and the associated heart attack) that dollar-cost averaging in crypto helps you avoid. Let me explain.

We’re not new to the volatility of prices in crypto, right? A regulator can choose to impose a ban on Bitcoin, leading to even more fear, uncertainty, and doubt as prices tumble. Or on the flip side, blockchain adoption might pick up speed, and companies can move to add their Bitcoin holdings, leading to increased euphoria and excitement in the market as prices rise.

In such cases, if you time your investment perfectly, you could make a lot of money very quickly. But on the other hand, if you made your investment at the wrong time, you could lose just as much.

This is where dollar cost averaging in crypto comes in as an investment strategy. With this technique, you can have a healthy balanced portfolio. Let’s get started with the basics.

What is Dollar Cost Averaging in Crypto (DCA)?

Dollar-cost averaging is an investment strategy that involves buying small amounts of a particular asset over time instead of buying it all at once.

The goal of dollar cost averaging in crypto is to reduce the risk of losing money if the price drops and also to be able to buy more coins when the prices are low. Sounds like a win-win, right?

How Does DCA Work in Crypto?

Say you want to invest $1,000 in Bitcoin. You could choose to invest it all at once, or you could spread your investment out over some time using dollar cost averaging in crypto. Here’s how both the situations would play out:

If you choose to invest the full $1,000 all at once, and the price of Bitcoin falls soon after you make your investment, you would lose money.

However, if you chose to dollar cost average your investment, you would have divided your $1000 into $100 dollar investments spread over a year or a month.

This means that even if the price of Bitcoin fell right after you made your first purchase, you would still have money to invest when the market recovers thereby averaging out your cost per coin as prices go up.

As a result, you would have lessened your losses (or even made a profit) if the price of Bitcoin continues to go up throughout the period of your investing.

For example, if an investor bought Bitcoin at a lump sum with its price at $60,000, the recent market crash that saw Bitcoin drop by over 50% would have left that investor with a 50% loss on their initial investment. However, an investor who applied dollar-cost averaging and started investing in Bitcoin with its price at $60,000 would be able to absorb the short as he would still have money to buy more Bitcoin at a 50% discount.

At higher prices, the DCA strategy will limit the amount of BTC the investor buys, and at lower prices the DCA strategy allows the investor to buy more BTC at discounted prices.

Simply put, DCA is a great way to reduce the risk of buying at a loss when prices are high or selling at a loss when markets crash. If you don't have a lot of money to invest, crypto dollar-cost averaging allows you to slowly but surely build your investment over time. What's more, this investment strategy removes much of the emotionally taxing and detailed work of timing the market for a perfect entry position.

How to Dollar-Cost Average Your Investment

There are two main ways to dollar cost average your investment:

Manual method: You can manually buy small amounts of a particular asset over time. For example, you could choose to invest $50 in Bitcoin every week.

Automatic method: You can set up an automated system to buy small amounts of a particular asset over time. For example, you could use a service like Coinbase's recurring buy feature to automatically invest $50 in Bitcoin every week.

No matter which method you choose, the key is to be consistent with your investments.

If you're manually buying assets, make sure you set aside a fixed amount of money every week or month to invest.

And if you're using an automated system, make sure you set up your recurring buys at regular intervals.

The most important thing is to be consistent with your investment strategy so that you can ride out the ups and downs of the market over time.

Benefits of using DCA to invest in cryptocurrencies

Reduced risk: By buying cryptocurrencies over time, you will reduce your overall risk of buying more coins at a higher price. For instance, you will be able to buy more coins at lower prices and make more gains when prices start to rise than buy at the top of the market and make losses when prices plummet.

Less stress: DCA reduces your risk as you won't have to worry about timing the market perfectly to make a profit. You can pretty much sleep well at night knowing that you are investing smartly and responsibly.

More profits: Over time, if the cryptocurrency you are buying is on a micro volatile trend albeit a macro upward trajectory, you will likely see more profits with a DCA strategy as each price dip will give you a chance to buy at a discount.

Easier on your budget: When you invest using DCA, you can spread out your investment over time. This makes it easier to invest in crypto and build a portfolio on a budget, as you won't have to invest a large sum of money all at once.

Building your wealth over time: Because you are buying assets regularly with DCA, you are slowly but surely building your wealth over time. By this design, you are able to average out your investments over the long term.

Risks Associated with DCA Strategy

Not all cryptocurrencies will recover: While crypto dollar cost averaging will help you reduce your losses if the price of a particular cryptocurrency falls, it is important to remember that not all cryptocurrencies will recover.

There is always the possibility that the cryptocurrency you are investing in could become worthless. Therefore, it wouldn't matter even if you buy more coins at increasingly lower prices. This is why it is important to choose a coin backed by a reliable team, a useful platform, and a strong community before investing with DCA.

Opportunity cost: When you invest using DCA in crypto, you are essentially buying more assets when prices are low and fewer assets when prices are high while investing the same amount of money at each turn.

This means that you could miss out on profits if the price of the asset you are investing in suddenly breaks into an upward trend without going down to give you discounted prices to accumulate more coins.

Tips for implementing DCA successfully

There are a few things to keep in mind if you're interested to dollar cost average crypto.

First, you'll need to decide how much money you want to invest and how often you'll make a purchase. It's also important to choose a reputable exchange where you can buy crypto securely. Once you've set up your account, you can start dollar-cost averaging by making regular purchases of your chosen cryptocurrency. Over time, this approach can help you build up a position in the market without having to worry about timing your investments perfectly.

Here are a few tips that will help you implement DCA successfully:

1. Have a plan: The first step to successfully implementing DCA is to have a plan. You need to know how much money you want to invest and how often you want to make your investment.

2. Stay disciplined: It can be tempting to sell your assets when prices are high or to buy more when prices are low. However, it's important to stick to your plan and make your investment at a predetermined time.

3. Review your progress: Every so often, it's a good idea to review your progress and see if you need to adjust your strategy. For example, you may want to increase your investment if you're doing well or decrease it if the market is crashing.

4. Have realistic expectations: It's important to have realistic expectations when using DCA. You shouldn't expect to make a huge profit overnight, but rather, you should focus on building your wealth over time.

Platforms that offer automated dollar-cost averaging

If you're interested in using dollar-cost averaging but don't want to manually make your investment, Robo-advisors are a good option.

We, at Hedgehog, also help you execute a DCA strategy extremely easy by allowing you to rebalance your options and adjust everything according to your portfolio.

What’s more, Hedgehog is a crypto-first robo-advisor that connects you to hundreds of wallets and exchanges to give you the best possible prices in the crypto space. With support for 500+ wallets ranging from centralized wallets such as Coinbase, Binance, and Kraken to decentralized ones such as MetaMask, you can DCA to your heart’s desire at any platform.

Final thoughts

Dollar-cost averaging is a great way to invest in crypto if you're on a budget. By investing small amounts of money over time, you can reduce the risks associated with buying crypto and also take advantage of market fluctuations. However, it's important to remember that DCA is not without its risks, and you could still lose money if the market crashes.

If you're interested in using DCA to invest in crypto, be sure to do your research and choose a reputable platform such as Hedgehog that can automate some aspects of the process for you.