What Does DCA Mean in Crypto Trading?

Each investment involves risk, and it also consumes time and effort to understand the market fluctuations. If you are new to crypto or simply looking for a long-term investment strategy, but don’t have the required time, energy, and willpower to complete a trading course, there is a method that doesn’t require learning technical analysis, and it is also a great way to mitigate volatility and manage the risks involved in crypto trading.

By using DCA, you can create an investment portfolio without prior knowledge. So what does DCA mean in crypto? Dollar cost averaging is a long-term investment strategy where you choose a specific crypto asset to buy in a fixed amount and over a particular time frame, and repeat the purchasing process for an extended period. For instance, you choose to buy $1,000 worth of Bitcoin on the 1st day of the month, regardless of Bitcoin price, for a period of five years. Setting a predetermined amount and time frame turns investing into a technical process that reduces the impact of the crypto market's volatility on your investment by averaging your asset-buying price over the long term.

The process helps reduce mental stress caused by the emotional turmoil associated with making high-stakes trading decisions. It is a proven method used by both beginners and experienced investors. Now that we understand how DCA can benefit you in the long term for crypto investments, let’s dive into the details and explore the principles of dollar cost averaging in a detailed guide.

Long-term DCA investment in Bitcoin

We prepared a table to illustrate the DCA process, which will help you understand what does DCA mean in crypto and whether it’s truly profitable. In this example provided by the PlasBit analytical team, the “investor” invested $100 each month over five years into buying Bitcoin stakes.

You can track his investment amount, portfolio value, and percentage change, along with the Bitcoin price at any given time during this period, as well as the total value of his Bitcoin portfolio. For example, if you started investing at the beginning of 2021, your gains for a stable DCA strategy would be staggering, at 177.1 percent, and your net gain in dollars for a $ 4,800 investment would be $8,498.41 at the end of 2024. 

Different approaches to crypto investment

We can examine several examples to illustrate why consistency is an important part of the dollar-cost averaging approach, and what does DCA mean in crypto investments.

Sticking to DCA

Our table illustrates the benefits of following a dollar-cost-averaging strategy in cryptocurrency. Some analysts propose a DCA crypto strategy to last six months to a year, while we think that at least five years is the optimal solution. As the BTC experienced some volatile moments over the last couple of years, the person who invested $100 each month in buying BTC for five years ultimately received the biggest reward.

However, even after six months, our example investor had nearly a 16.5% profit and an additional $98.96 on their $600 investment. By committing to the DCA strategy, you avoid the risks associated with market booms and the crisis and fear that often accompany downturns. During the significant decline in the BTC price in 2023, our investor had a net loss of $343.29. However, at the end of the proposed five-year period, there was a staggering 320.7% increase in percentage, and a profit of $19,240.20 on a $ 6,000 investment.

Panic selling due to marked decline

Even though dollar cost averaging is supposed to separate emotions from investing, it is still hard for investors to stay calm when BTC loses value like it did at the beginning of 2023. Unfortunately, in the case of an investor who sold its assets during the declining months, the loss was between 6 and 9 percent.

Had he held on for a couple of months, the revenue would have turned profitable, and he would have ultimately earned a profit. Leveling out highs and lows is what a long-term DCA strategy is best for. Still, there is no guarantee that your crypto investment will yield a return greater than your initial investment.

Not minding the budget

Setting aside a reasonable amount for your crypto investment is an essential element of dollar-cost averaging, because you need to invest a fixed amount regularly. If you spend all your money too quickly it will be almost the same as using it all at once, and buying all your Bitcoin at the same price. Making a lump sum investment like this can lead to significant profits if the timing is correct, but it’s risky. If the market drops soon after, you could lose a lot of your investment and miss out on the benefits of a long-term plan.

Lump sum vs DCA Crypto strategies

Running out of funds to keep investing over time is just the same as putting all your money in at once.

While investing everything at once, also called lump sum, can generate more profit, it also comes with the risk of greater losses, and although at first it may sound like a good idea, you will need a deeper understanding of the market, investment trends, how cryptocurrency works, and trading in general to follow this strategy effectively.

If you time the bull run, a period in the financial market when prices are consistently rising, this strategy makes sense. However, even leading experts struggle to predict the movement of BTC due to its volatility.

So, how do you choose between lump sum vs DCA Crypto? It depends, DCA is better for people who aren’t looking for quick profits, don’t have a large capital to invest, lack the time or interest to learn trading, or are afraid of losing money/dealing with the stress of trading. Lump-sum investing suits people who have a large starting capital and a higher risk tolerance. Remember that without a solid understanding of the market and trading strategies, it can lead to significant losses. Although in some cases, lump sum trading has shown greater results, even in the long run, not everyone is suited for large capital investments. Therefore, it is essential to know your own financial limits and have adequate mental strength and be emotionally stable.

DCA crypto strategy vs investing in S&P

Trading and investing are time-consuming and require unique skills and knowledge. One of the more conservative approaches for novice traders and those who can’t dedicate time and effort to following the market has been investing in the S&P 500 Index. If we follow the DCA investment strategy in S&P during the same period as our BTC example, we can observe continuous growth in the value of the investment portfolio.

An investor who follows the same $100 per month DCA approach generally has one month with a loss of 3.6%. However, the gains are much more conservative. While 47.6% is not a negligible revenue, the total profit of $2,857.73 over five years is significantly below what you would earn if you had invested the same $6,000 in BTC.

Several factors make BTC a more suitable asset for a DCA strategy. As illustrated in our example, Bitcoin has the potential for higher returns based on its historical growth. Although BTC has been historically more volatile, and also has a strong correlation with the US indices, which are dependent on company performance and can be influenced by external factors such as government measures or geopolitical events, it has proven it's ability to recover from big downturns, and enjoy higher growth rate than the S&P.

There isn’t an entity that controls the most prominent cryptocurrency. BTC has a fixed supply of 21,000,000 tokens, exhibiting deflationary properties due to its finite supply and periodic “halving” events, which reduce the rate of new BTC being created.

DCA crypto strategy vs. buying the dip

The core principle of buying the dip (decrease in price), an investment strategy that involves buying an asset after a drop in price with the expectation of a later recovery, requires you to wait for a significant price drop in BTC. Once you recognize the dip or substantial price drop, you invest a larger sum to maximize gains.

While it sounds lucrative and effective, buying the dip presents some significant challenges, primarily identifying a genuine dip. You should be experienced enough to know the difference between price fluctuation and a bigger dip. Even if you recognize the dip, you should have enough knowledge and information to ensure that some substantial problems with the asset do not cause the price drop, and may even lead to further price drops or prolonged periods where the price remains low.

DCA resolves some of the main issues associated with buying the dip. It removes emotional stress, fear of missing out, and timing risk. It also allows you to build an investment portfolio without profound market knowledge.

DCA vs timing

Timing the market is a broader strategy that predicts market movements to buy low and sell high. Buying the dip is a subset of market timing, which involves buying at the right time and selling at the right time, based on market trends and predictions.

Timing the market is more time-consuming and requires a deeper understanding of the crypto market to make it effective. As you try to capitalize on price movements, you will have to spend extensive time looking at charts and tables.

Again, DCA bypasses most of the emotional toll and saves time you would otherwise spend on predicting the market. Simultaneously, as PlasBit's provided table shows, investing regularly using a dollar-cost averaging strategy smooths out volatile market movements and yields substantial returns. A few things answer what DCA means in crypto better than its difference compared to timing.

How does DCA work in crypto?

Bitcoin has historically exhibited a consistent upward trend, with sharp spikes and deep corrections. Dollar-cost averaging takes advantage of the crypto nature where you can mitigate the risk of big drops, and take advantage of its steady overall climb. Let’s see how does DCA work in crypto? You invest a relatively small amount in a fixed time interval instead of investing a large sum in one purchase, for example, $100 every last day of the month. It reduces risk, and helps you avoid the impact of market volatility. After 12 months, you will have a better chance of making a profit than investing all the $1200 at once. Investing a big sum without learning the market first could lead to a big loss.

Main advantages of the DCA crypto strategy

If you’re not a professional trader, entering the investment world can be overwhelming. One of the main benefits of DCA is simplicity, as you don’t have to analyze daily, place multiple trade orders, or worry about many technical details. If simply building an investment portfolio isn’t enough, here are some other traditional benefits of dollar-cost averaging.

• Avoiding a volatile market - Since BTC has historically had an upward trajectory, many investors want to share in the profit. However, despite the overwhelmingly positive graph, BTC and other crypto assets are volatile. Playing a long DCA game avoids big blows. You will get more BTC when the price is in decline, and fewer when the price is rising sharply..
• Less emotional toll - Traders who stay glued to charts can make poor decisions due to emotional stress. Whether you face fear, uncertainty, or doubt, or you fall victim to common greed, hope, or frustration, the DCA strategy avoids this emotional rollercoaster by continuously investing at a steady pace, regardless of the market conditions.
• No need to time the market- In our example, the investor buys $100 worth of BTC every 1st of the month. Because even seasoned traders struggle to time the market, a rookie investor will face an uphill battle trying to anticipate the next move of the market. The dollar-cost averaging strategy is not influenced by market movements, and you won’t have to monitor and research.

DCA Saves Time & Money vs the Costly Investing Learning Curve

Chess is a simple game that anyone can play, but only a few master it. To paraphrase the familiar quote, learning to trade requires a significant amount of effort and time. You can start trading immediately, but understanding the nature of assets, market flows, and even basic principles and lingo can take time.

You can invest a lot of money in available courses that promise you can “spend 30 minutes a day” to manage a trading account and understand the crypto market. In most cases, traders become glued to the screen, constantly monitoring the market. Some individuals with unique traits may find that trading becomes a form of gambling.

Whether you have just started learning about trading or are more experienced, managing your assets in a volatile market will take a significant psychological toll. You can easily avoid all these issues by using DCA, it resembles managing your savings account more than traditional trading. On that note, you can continue saving and use it instead of a savings account for your kids until they turn 18.

Creating an effective DCA strategy

To maximize the benefits of your DCA investments, follow these steps to create an effective strategy.

1. Decide on the amount to invest- The price of your periodic investment must be within the budget you can commit, regardless of the market’s state. Like in any other trading, you shouldn’t invest from your essential funds, as there is no guarantee that DCA will bring you profit in the end. It could be $10 or $1,000, or any amount you can set aside within a specific time interval.
2. Decide on a fixed time interval - Once you have decided on the amount, consider the timing. You can invest the chosen amount on a weekly, monthly, or quarterly basis. It is essential to keep a consistent schedule for this strategy to be effective.
3. Make a minimum time commitment - Make sure you can commit to a minimum of 5 years without cashing out your assets. Otherwise, this strategy will not be as effective.

What is an example of DCA in Crypto?

Speaking theoretically, any continuous crypto investment in fixed intervals over a prolonged period can be dollar-cost-averaging trading. However, we have a couple of scenarios that show how this strategy works in real life. Let’s dive in and see, what is an example of DCA in crypto? A few examples:

1. You can invest $300 in BTC every two months for a period of 5 years.

2. You can invest $50 in ETH every week for 10 years.
3. Investing $500 every month in a diverse portfolio of 50% BTC, 30% ETH, 15% SOL, and 5% XRP for 7 years.

You have a better chance of making a profit instead of investing $9,000 in BTC, $13,000 in ETH, or $42,000 in your diverse portfolio, all at once.

Mitigating the psychological aspects of regular crypto trading with DCA

Regular crypto trading can be rewarding, but the continuous change, market volatility, and daily stress can be hard, emotionally and mentally. There are several psychological aspects you should consider. Luckily, you can avoid most of those issues with a DCA strategy.

Similarly to social media behaviour, traders can get obsessed with news and market movements, so when you become obsessed with news or market movements, you can experience fear of missing out, or FOMO, and it can cause you to buy at market peaks due to surrounding hype. A fixed long-term investment can help you avoid impulsive buying during a bull run.

Fear, uncertainty, and doubt, or FUD, are similar emotions that can cause you to sell crypto assets during sharp drops in price. If you read negative news and social media posts, it can confirm your negative bias and lead to the sale of assets that have the potential for recovery, which could result in significant losses. Dollar cost averaging can again prevent you from impulsive, fear-driven selling.

Basic human emotions, such as greed or overconfidence, can blur your judgment, making you chase higher profits and hold assets for too long, or overestimate your timing skills and buy or sell at the wrong time. The DCA strategy mitigates such challenges by maintaining long-term, continuous investment, regardless of market movements.

Analysis paralysis is a trap even the most experienced traders can fall into. Reading and analyzing too much information, especially hearing conflicting reports, can lead to indecision, which results in missed opportunities.. Dollar-cost averaging doesn’t rely on daily market moves, news, or any other change. It's a long-term commitment aimed to bypass market volatility and the need to time the market effectively, as well as understanding where it’s heading.

DCA strategy can help you avoid regretting mistimed trades, such as impatient moves that seek quick profits, or abandoning a good strategy by succumbing to herd mentality, where traders follow crowd behavior by buying during a time of hype or selling during a downturn.

Conclusion

Understanding what does DCA mean in crypto trading unlocks a powerful, low-stress strategy for both rookie and seasoned investors. DCA revolves around investing a fixed amount, for example $100, over a prolonged period. By using dollar-cost averaging, you can smooth out market volatility, minimize emotional decisions, and avoid the stress of daily trading. Buying below the average price point in the long run could be an additional advantage.

With no need to time the market, even regular people and experienced traders can easily build portfolios in assets like Bitcoin, Ethereum, or other cryptocurrencies. It’s essential to note that there are no investment guarantees with DCA. However, the historical performance of BTC shows significant potential for a dollar-cost averaging strategy.