Beginner Series

Employ the Dollar-Cost Averaging (DCA) Strategy With Recurring Buys

Dollar-cost averaging is a popular investment strategy used by both institutions and individuals. It involves regularly small investments over time, rather than making one large purchase. In that way, the dollar cost of the investment is averaged out over time. 

Dollar-cost averaging is an especially popular investment strategy in cryptocurrency, as it’s seen to help deal with crypto’s volatile prices. For investors with a consistent income but lack the time to closely follow the market, dollar-cost averaging is an especially popular investment strategy. 

It’s easy to set up a DCA strategy with Cointree. You can use Cointree’s Recurring Buys feature to purchase cryptocurrency automatically, every day, week, or month.  

Contents

  • What is dollar-cost averaging? 
  • How does dollar-cost averaging work?
  • What are Recurring Buys?
  • Dollar-cost averaging with Recurring Buys on Cointree
  • Calculating the dollar-cost average
  • Is the dollar-cost averaging strategy right for me? 
  • Bitcoin dollar-cost averaging
  • Cryptocurrency dollar-cost averaging
  • Looking ahead

What is dollar-cost averaging? 

Dollar-cost averaging is an investment strategy where you purchase an asset at regular intervals, regardless of the current price. Instead of saving your money to make one big purchase, you consistently make smaller purchases along the way. 

It's a popular choice by many investors who see it as a strategy for building their wealth while neutralising short term volatility. For many investors with a long-term investment horizon, dollar-cost averaging has been a highly successful investment strategy. In fact, you’re probably using the dollar-cost averaging method by default already if you have a superannuation plan. 

Dollar-cost averaging is one of the most popular investment strategies among both institutions and individuals. 

How does dollar-cost averaging work?

Let’s take a real world example. Dave works as a manager at a large corporation and earns AU$4,000 per week. He has heard about the dollar-cost averaging investment strategy and decides that he will try it for one year. 

At the start of 2020, Dave decides that he will invest 25% of his salary into bitcoin for one year. Every single Wednesday, regardless of the price, he diligently purchases AU$1,000 of bitcoin. Some weeks Dave purchases bitcoin at a higher price, other weeks at a lower price. 

At the end of 2020, Dave had invested AU$1,000 for 53 weeks and now owns 3.55 bitcoins. If he had saved up this money during the year and made one big purchase of AU$53,00, he would only have 1.41 bitcoins.

In this example, what is the dollar-cost average? Let’s find out. 

What are Recurring Buys?

Recurring Buys are a feature available on Cointree. They let you make automatic cryptocurrency purchases every day, week, or month. As you can see, Recurring Buys are the easiest way to apply the dollar-cost averaging strategy.

Here’s why Recurring Buys are such a powerful feature: 

  • Employ the DCA strategy.
  • Save time with automatic purchases.
  • Remove emotions from your investment decisions. 
  • Build your portfolio over time and compound your wealth.
  • Invest a portion of your paycheck automatically.
  • Set and forget.

Let’s now take a look at how you can set up Recurring Buys on Cointree and start applying the dollar-cost averaging investment strategy. 

Dollar-cost averaging with Recurring Buys on Cointree

When you invest through Cointree, it’s easy to use the dollar-cost averaging strategy and automatically buy coins every week, fortnight, or month — all it takes is a few clicks. 

Here’s how you can set up Recurring Buys on Cointree: 

  1. Select the Recurring Buy option on the Buy Coin page.
  2. Enter the AUD amount you'd like to purchase.
  3. Choose the cryptocurrency to purchase.
  4. Pick the date to start making your Recurring Buys. 
  5. Select the frequency of your purchase, which can be daily, weekly, fortnightly, monthly, or a custom period.
  6. Confirm your Recurring Buy automated order.
  7. The Cointree platform automatically makes Recurring Buys on your behalf, without you having to do anything.

With over 160 different cryptocurrencies on Cointree’s exchange, including bitcoin, Ethereum, and Chainlink, you can build a diversified cryptocurrency portfolio through dollar-cost averaging on Cointree.

Calculating the dollar-cost average

It’s easy to calculate the average unit price paid for an asset, such as a share or a bitcoin, when investing with a dollar-cost average strategy. We simply take the total amount of dollars invested and then divide that figure by the total number of units purchased. That gives us the average price paid per unit. Here’s the formula:

  • Average price paid = Total sum invested / Number of units

We can apply this formula to the example above: 

  • AU$53,000 / 3.55 bitcoin  = AU$14,929 per bitcoin

Now you know what it is and how it works, you might be wondering, is it right for me?

Is the dollar-cost averaging strategy right for me? 

While traders that dedicate time and energy to the market can often generate superior returns, not everyone has the time. Many investors have busy jobs, an engaged family life, and other passions. However, they still want to invest in growing asset classes. Dollar-cost averaging is a popular strategy among these investors. 

The dollar-cost averaging strategy is especially prevalent among:

  • Investors with a long-term timeframe 
  • Professionals with a regular paycheck to invest a portion of every week or fortnight
  • Busy Mums and Dads that don’t have the time to closely monitor the market
  • SMSF trustees with regular inflows
  • Emotional investors who want a strategy that brings discipline to their investing
  • Investors in volatile asset classes such as cryptocurrency

Essentially, dollar-cost averaging is often used as a time-efficient strategy by investors that aren't serious traders. 

Bitcoin dollar-cost averaging

Bitcoin has been the best performing asset over the past decade, with its compound annual growth rate reaching over 200%. However, these returns come with a challenge—volatility. 

As with any rapidly growing network that has a small market cap compared to the traditional financial market, bitcoin’s price has moved sharply. While this volatility can be great for traders, it can be challenging for long-term investors. Dollar-cost averaging is one strategy some bitcoin investors use to deal with this volatility. 

As we are investing smaller amounts over time, the dollar-cost averaging strategy is seen as a tool to make sure we don’t invest all of our funds at the wrong time, like at the peak of a bull market. Of course, this may mean we miss buying at the exact bottom of a dip, but it remains a popular strategy for long-term investors—even for crypto CEOs. 

Adam Traidman is the CEO and co-founder of the popular crypto wallet, BRD, which has over seven million users. Applying the dollar-cost averaging strategy, he uses a portion of his paycheck to buy bitcoin, regardless of the price. He believes that time in the market is more important than timing the market. 

“Dollar-cost averaging ends up making sense in the long term,” he says. “If you contribute a little bit every time, in the long term you end up with a pretty darn good return if you can weather all the ups and downs.” 

Ultimately, for experts and beginners alike with a long-term timeframe, dollar-cost averaging is a strategy used to accumulate as much bitcoin as they can, even if it’s purchased in small amounts. In other words, bitcoin dollar-cost averaging is the strategy behind the beloved bitcoin phrase ‘stacking sats’. 

Cryptocurrency dollar-cost averaging

While bitcoin is volatile, other cryptocurrencies have even greater price swings. With smaller market caps and even faster growth than bitcoin, it’s easy for their prices to rise and fall over short periods. Much like in bitcoin, dollar-cost averaging has been a popular strategy for long-term investors who believe in the fundamentals of a project. 

For example, while Ethereum, Cardano, and Solana investors saw limited growth from 2018-2019, they all rewarded long-term investors with 1,000% price increases from 2020-2021.  

Looking ahead

Whether you’re adding equities to your portfolio, stacking sats, micro investing, or accumulating crypto, dollar-cost averaging is a popular strategy many investors use today. As we discussed, many cryptocurrency investors use dollar-cost averaging to neutralize the inherent volatility in the asset class. 

Stacking sats with dollar-cost averaging has historically produced high returns. If you had started dollar-cost averaging AU$10 per week into bitcoin at the end of 2012, you’d have over AU$1 million by the end of 2020. 

Can the outsized returns continue? We don’t even have to look past dollar-cost averaging to see potential innovations. 

In the future, if cryptocurrency projects such as Chainlink can successfully tokenize real-world assets such as mansions in the Hamptons and vintage Aston Martins, dollar-cost averaging could be applied to an even greater pool of assets, giving all investors access to entire asset classes that are currently only accessible to the wealthy. 

It’s innovations such as these that make so many long-term investors excited about the prospects of cryptocurrency. Dollar-cost averaging is simply a tool to help them invest. 

Now, with our new Recurring Buys feature on Cointree, DCA is an easy and accessible crypto investment strategy for every Australian that can help them write their own bitcoin success story

Disclaimer

Information provided is for educational purposes and does not constitute financial advice or investment strategy. You should obtain independent advice from an Australian financial services licensee before making any financial decisions.