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Crypto’s Hilarious Attempt at Mak…


Key Takeaways:

  • What is dollar cost averaging?
  • DCA applies to crypto assets, but market conditions are key.
  • Bitcoin and XRP profit, while DeFi coins lose.

YEREVAN (CoinChapter.com) — Dollar Cost Averaging (DCA) is a popular investment strategy. But does it work with crypto markets? Let’s discuss.

Dollar Cost Averaging and Its Benefits

DCA implies investing the same amount of money in a target asset at regular intervals over a certain period, regardless of price. It helps eliminate the FUD and automate the investments against market instability.

401(k) plan in the US, a retirement savings and investing plan offered by employers, is a good ol’ example of DCA. Employees allocate a certain percentage from each paycheck toward a personal account, which then pours into earlier-agreed-upon investment funds and assets.

DCA in action. Source Amundi Investments
DCA in action. Source Amundi Investments

Jittery markets can put additional strain on investors not yet sure of their “6th sense.” Thus, dollar cost averaging takes part of the stress away. It assumes that the prices will eventually rise, and “buying the dip” will omit the volatility. Also, DCA emphasizes the importance of regularity over the size of allocations.

However, dollar-cost averaging isn’t for everyone and doesn’t apply to ANY market situation. Let’s look closer at the crypto sector, its typical investors, and whether DCA is a viable strategy for them.

DCA Has No Hard Feelings For Crypto

Let’s say the average crypto-trading Joe has $50,000 they’d like to invest in Bitcoin (which they typically don’t, but bear with us as $50,000 is illustrative). Let’s be optimistic and assume that one BTC costs $50,000. If Joe makes a one-time investment, he’d have one Bitcoin.

However, if he spreads that $50,000 across five equal $10,000 buys when BTC trades at $50,000, $45,000, $25,000, $25,000, and $55,000 a pop, his average cost basis would be $40,000, and he’d have 1.4 Bitcoin. 

The gist is obvious. It does work long-term if the asset price eventually rises back. Let’s put a pin in it, as it’s an important circumstance.

 dollar cost averaging. Source: phemex academy
Dollar-cost averaging vs one-time investment. Source: Phemex Academy

Some crypto investors have adopted and applied the DCA strategy across the sector, diversifying into high-risk altcoins. However, numbers show that it was not such a great idea. Reddit crypto enthusiasts ran the numbers from each coin’s all-time highs, assuming the DCA amount at $100 every month from October 9th (1 month before the ATH)  for a total of 24 months, as, let’s face it, many investors DID buy the top.

Not All Cryptos Yield Returns with DCA

Bitcoin and XRP were the only coins to come out of the calculation “alive” and make a profit for their holders. Whether the altcoins had a limited supply, most came out at a loss. “Subreddit’s most beloved coin,” Algorand’s ALGO, emerged with a spectacular loss of 61.4% from its all-time high, with 0 months in green.

Dollar cost averaging was cruel to crypto. Source: Reddit.com
Dollar-cost averaging was cruel to crypto. Source: Reddit

The simulation illustrates that traders should have more than one trick when dealing with crypto assets. As mentioned, DCA is a long-term strategy that assumes the markets will eventually recover from whatever turbulence makes them jittery.

However, let’s face it: not all altcoins will make it out of the storm. Rewind to the earlier pin; while Bitcoin has fundamental qualities that make it valuable, it might not be right for many DeFi coins.

What should our average Joe do with his hypothetical $50,000? Diversify his strategies and assets, research the market thoroughly, and avoid buying at the top, even when it’s the “subreddit’s most beloved coin.”



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