What is dollar-cost averaging?

Token Takeaways ✍️

✨ Dollar-cost averaging is an investment strategy that involves buying into an asset at regular intervals regardless of the price. 

Many crypto investors use the dollar-cost averaging method to accumulate cryptocurrency like BTC and ETH during downturns.

✨ Dollar-cost averaging is popular among new token adopters as it does not require trading skills and can reduce volatility risk.

The crypto universe has huge promise, but it can sometimes feel overwhelming. There’s a lot to learn when you first enter the space, and it can be difficult to keep up as the technology evolves so fast. For many new adopters, working out what is the best crypto to invest in and how much to invest is a challenge. One of the most popular strategies among new adopters looking to get exposure to crypto tokens is dollar-cost averaging. Learn how it works below.

What is dollar-cost averaging?

Dollar-cost averaging, or “DCA,” involves investing a set amount of funds into an asset at regular intervals, regardless of the asset’s price. 

For any investor, the ideal outcome is to buy an asset when the price is low and sell it when the price is high. However, in practice, it’s difficult to time the market. 

This is especially true in the crypto market, where extreme volatility is normal. Crypto investors, using a crypto exchange platform, face the risk of buying a token before it suffers from a significant price drop.

Dollar-cost averaging is popularly used by investors who want to reduce the impact of market volatility and get exposure to an asset that could appreciate over a long period of time. 

In the crypto space, dollar-cost averaging can help investors get exposure to a promising technology while reducing their exposure to volatility.

It also helps investors automate their purchases and commit to buying into an asset on a regular basis. 

Why dollar-cost averaging is a popular strategy for token investors 👌

Dollar-cost averaging has many benefits, which is why it’s popular among crypto adopters.

It helps people get exposure to the promise of token technology without running the risk of investing their entire holdings at a market top. This is relevant in the crypto space, where hype-driven bull cycles frequently lead the market into euphoria.

During the last token bull cycle, Bitcoin topped $69,000 as the global value of the space hit $3 trillion in November 2021. A year later, it was trading 75% down from its peak.

Dollar-cost averaging can also reduce the average price of purchases over time. This helps limit the impact of market volatility. For example, if someone invested $10,000 in BTC from November 2021 through November 2022, their average purchase price would be lower than if they had invested the full $10,000 at the market peak. 

Dollar-cost averaging also automates the process of investing. It removes the need for working out how to time the market and helps people establish a practice of regular investing. 

Avoiding emotional trading ⚠️

Dollar-cost averaging also prevents the risk of succumbing to emotions or making irrational trading decisions. When market prices make a heavy swing in either direction, people often make decisions based on emotions like fear or euphoria. But emotional trading or “FOMO” can harm portfolio returns. It’s generally not the best idea to rush to buy at the market peak or sell at the market bottom. 

While some traders profit from the crypto market’s volatility, the most successful ones are experts. Statistically, most traders lose what they put into the market. This also explains why dollar-cost averaging is a solid option for new and seasoned token adopters.

Dollar-cost averaging also removes the risk of being “sidelined” when the market heats up. The crypto space is famously hard to predict, and sentiment can change fast. When Bitcoin starts to rally, it can rally very quickly. This creates risk for anyone who tries to time the perfect entry. While the ideal scenario would be to buy the bottom, that’s harder than it sounds. With the dollar-cost averaging method, investors regularly buy into the market. That way, they’re ready for any potential surges.

An example of the dollar-cost averaging method 💵

Here, Alice invests $12,000 into Bitcoin on 1st January 2022. Bob, meanwhile, invests $1,000 on the 1st of every month in 2022.  

Following the DCA strategy with Bitcoin throughout 2022 vs. buying a lump sum at the start of the year. In this example, Bob follows the DCA strategy and ends up with more Bitcoin than Alice at the end of the year.

As Bitcoin suffered from harsh market conditions in 2022, both Alice and Bob saw losses at the end of the year. However, Bob’s portfolio came out in much better shape. He accumulated 0.458 BTC and ended up with returns of -42.7%, while Alice bought only 0.259 BTC with returns of -62.9%. 

At today’s prices, Bob’s BTC holdings would be worth $9,920, while Alice’s would be worth $5,610. 

This is an extreme example taken from one of Bitcoin’s worst-performing years ever. But it shows how dollar-cost averaging can beat investing a lump sum at the market peak.  

How to get started 💫

If you want to get exposure to the crypto market, dollar-cost averaging is a great way to start.

token.com optimizes for the dollar-cost averaging strategy as it makes it easy to buy a set amount of a token, whether you want to put in $0.25, $1, $10, or $50.

All you have to do is choose the token Card, set the amount you want, and hit the buy button. 

Learn more 👀

Now that you’ve read our guide, you should have a better idea of how dollar-cost averaging works. It’s worth noting that this strategy does not eliminate the risk of buying a token at a high price or guarantee returns. However, many token adopters have found success by using it to get exposure to the fastest-growing asset class in history. Ultimately, it’s up to you to decide the method that works best for you when choosing the best crypto to invest. To learn more and get started on your journey, head to the token.com app today.

Please note: Investing in cryptoassets is risky. Due to the volatile nature of the cryptocurrency market, investors run the risk of losing their funds when they make an investment. Returns from cryptoasset investing are not guaranteed, therefore users should always be aware of the risks.