59% of Crypto Investors Use Dollar-Cost Averaging. Should You?

It's Monday morning and my paycheck just came through. I'm ready to buy $1,000 of Bitcoin. I look at prices, only to see that the cost of BTC jumped 20% over the weekend. Now I'm stuck. I don't want to buy if prices are going to drop again tomorrow. But I also don't want to miss out on a rally.

If this scenario sounds in any way familiar, you'll understand why dollar-cost averaging (DCA) is popular with crypto investors. Cryptocurrency prices are so volatile that a 10% or 20% swing is just another Tuesday. Anything that can make buying Bitcoin (or any other crypto) slightly less of a rollercoaster is worth a closer look.

What is dollar-cost averaging?

Dollar-cost averaging involves investing a fixed amount at set intervals, whether that's weekly, bi-weekly, monthly, or more. That might mean you buy $50 of Bitcoin every Monday at 10 a.m. No matter what the market is doing, you'll go ahead and make that purchase.

It works well for long-term investors and can be particularly effective with volatile assets. As such, it isn't so surprising that so many crypto investors have embraced DCA. A recent survey by Kraken found that over 80% of investors had used DCA at some point, while 59% said it was their primary investment strategy.

Pros and cons of DCA investing

The biggest caveat to DCA investing is that -- like most buy-and-hold investors -- it assumes prices will trend upward over time. That makes it all the more important to do your research, so you're confident about why you're buying.

Advantages of DCA

DCA works well if you're, say, investing a portion of your paycheck. Check the fine print for your crypto exchange or brokerage to see how to schedule a recurring buy. Benefits include:

• Reduces emotional decisions: It is all too easy to panic buy, sell, or freeze when emotions take over.
• Balances out volatility: Buying at both high and low prices can smooth out market fluctuations.
• Build your portfolio over time: Making consistent investments is a good way to build wealth.

Disadvantages of DCA

DCA will suit many investors, but it isn't right for everybody. Here are some of the downsides:

• It can still take discipline: There may be long stretches when your portfolio is in the red and it's tempting to stop investing.
• Lump-sum investments might do better: Studies show that it can be more profitable to invest a lump sum on the stock market than split it into smaller investments. That logic may not apply to more volatile crypto markets.
• You may pay more in fees: If you pay a fee for each transaction, those could eat into your returns.

How DCA might work in practice

To give you an idea of how it might work in real life, we looked at historic BTC prices. The table below shows how buying $100 of BTC at the start of every month in 2022 and 2023 would have panned out.

The strategy eventually generates a profit of over $1,000. But it wouldn't be easy to wait out those 11 bolded months in the middle when your portfolio was worth considerably less than you'd invested.

Bottom line

If you are confident that the crypto you're buying is going to perform well in the long term, DCA can be an excellent way to minimize the impact of volatility. Even then, the usual rules of crypto investing apply: Make sure it represents a small part of a broader investment portfolio and only invest money you can afford to lose.