How to DCA Crypto? Dollar Cost Averaging Investment Strategy

How to DCA Crypto Dollar Cost Averaging Investment Strategy

Dollar-cost averaging is an easily, well-tested, and suitable strategy for many long-term investors.

Let’s break this strategy down and sort out why it’s so popular among several top investors.

  • What is DCA?
  • How to start a DCA strategy? Step-by-step
  • Mitigate the risks with a DCA strategy
  • Tax implications of a DCA strategy
  • DCA Calculator

What is DCA?

Buying calender for DCA dollar cost averaging

To become a successful DCA investor, you need the self-discipline to buy with the same amount at the same intervals.

DCA(dollar cost averaging) allocates money regularly to purchase an asset. Some give a certain amount on a predetermined schedule, but there are different ways to implement this strategy.

For example, you can use $100 from every paycheck to buy Bitcoin.

Why is DCA a preferable accumulation method?

Dollar-cost averaging (DCA) is a preferable accumulation method because it allows investors to buy assets over time at different prices, which can reduce their overall cost basis. This is especially important in volatile markets like cryptocurrency, where prices fluctuate wildly.

With DCA, investors can avoid trying to time the market and buy when prices are low. Instead, they can buy a set amount of assets regularly, regardless of the price. This can help to reduce their risk and maximize their returns over the long term.

Here are some of the benefits of using DCA to accumulate cryptocurrency:

Reduces risk: By buying cryptocurrency at different prices, DCA can help to reduce your overall risk. This is because you will not be buying all of your cryptocurrency at the highest price, and you will be able to average out your cost basis over time. Also, since you are buying on a predetermined regular basis, you remove emotions from the decision-making, reducing the risk.

Simplicity: DCA is a very simple investment strategy to implement. You must decide how much cryptocurrency you want to buy each month or week and then set up a recurring order with your exchange.

Flexibility: DCA is a very flexible investment strategy. You can adjust your monthly or weekly investment amount anytime and stop buying cryptocurrency.

Overall, DCA is a preferable accumulation method because it reduces risk, maximizes returns, is simple, and is flexible.

How to start a DCA strategy? Step-by-step

A man watering a flower on regular basis

Much like a water plant, a financial portfolio must be regularly taken care of.

To start a Bitcoin DCA strategy, follow these steps:

  1. Choose a cryptocurrency exchange. Many different cryptocurrency exchanges are available, so choosing a reputable and secure one is important. Some popular exchanges include Kraken, Coinbase, and Binance.
  2. Set a budget and investment frequency. Decide how much Bitcoin you want to buy each month or week and how often you want to buy it. A common DCA strategy is to buy Bitcoin every week or every two weeks.
  3. Set up a recurring buy order. Most cryptocurrency exchanges allow you to set up recurring buy orders. This means that the exchange will automatically buy Bitcoin for you regularly, without you having to do anything.
  4. Stick to your plan. The key to DCA is to be disciplined and stick to your plan. Even if the price of Bitcoin is high, keep buying regularly. And if the price of Bitcoin is low, don’t try to time the market and buy more.

Bitcoin DCA strategy Example

DCA buying and selling Bitcoin BTC from 2017 to 2022 graph from Cingecko

A perfected implemented DCA strategy for Bitcoin 2017-2022, graph from Coingecko. Green dots symbolize buying occasions, and red dots sell occasions. 

  • Budget: $100 per week
  • Investment frequency: Weekly
  • Recurring buy order: Buy $100 worth of Bitcoin weekly, regardless of the price.

This strategy is simple to implement and requires minimal effort. Over time, it can help you to accumulate a significant amount of Bitcoin.

Here are some additional tips for starting a Bitcoin DCA strategy:

  • Start small. You don’t need to invest much money to get started with DCA. Even if you can only invest $20 or $50 per month, that’s still a good start.
  • Be patient. DCA is a long-term investment strategy. Don’t expect to get rich quickly.
  • Reinvest your earnings if you choose to earn Bitcoin interest rewards. Once you start earning rewards from your Bitcoin investment, consider reinvesting those rewards to buy more Bitcoin. This can help you to grow your investment even faster.

DCA is a safe and effective way to invest in Bitcoin. Following the steps above, you can start your Bitcoin DCA strategy today.

Tax implications for DCA selling

If you sell Bitcoin with a profit, you are creating a taxable event in most jurisdictions. 

Here, many traders get lost since it’s tough to plan.

Example for tax implications on a Bitcoin sell.

  1. You buy Bitcoin in Sweden for 10.000 SEK = $1.000 = 0.1 BTC
  2. Bitcoin price goes up to $20.000/BTC, and your 0.1 BTC for $2.000 with a 100% profit.
  3. Bitcoin now goes down to $18.000, and you buy back into Bitcoin with $2000, giving you 0.111 Bitcoin, and you have increased your BTC holdings by 11%.
  4. After six months, Bitcoin is at $12.000, and now you have to pay taxes on the $1000 profit you made selling your Bitcoin at $2000. Sweden’s tax rate is 30% for every profit taken in a taxable event. In this case, this equals $300 since the profit was $1.000.
  5. Now, you must sell $300 (0.025 BTC at $12.000) from your investment to pay your taxes on a Bitcoin level where you have to take a loss. Now, you have 0.111-0.025=0.086 BTC.

Conclusion: If you live in a jurisdiction with tax implications on your crypto trading, it might be worth considering only accumulating and not selling. 

Why?

Even if you sell at almost the highest levels and buyback at lower prices, you might end up with less crypto because of the tax implications.

Dollar Cost Averaging Calculator

It’s interesting to keep track of your average buy-in price or average cost for your Bitcoin or altcoin you have accumulated with a DCA strategy.

Here is a calculation example. Let’s say you buy Bitcoin 1 time each month over six months for $100 on each occasion.

  1. BTC price $20.000
  2. BTC price $19.000
  3. BTC price $20.500
  4. BTC price $21.000
  5. BTC price $21.500
  6. BTC price $22.000

What is the average buy price for your Bitcoin?

(20.000+19.000+20.500+21.000+21.500+22.000) / 6 = $20.666

However, the above method simplifies and only applies if you bought the same amount each time.

If you happened to buy with a different amount each time, you have to add this to the calculation.

The formula is: Total cost (USD) / Total acquired BTC

  1. BTC price $20.000, buy with $600
  2. BTC price $19.000,buy with $500
  3. BTC price $20.500, buy with $400
  4. BTC price $21.000, buy with $300
  5. BTC price $21.500, buy with $200
  6. BTC price $22.000, buy with $100
  • Total cost = (600+500+400+300+200+100) = $2.100
  • Total BTC =  (600/20.000+500/19.000+400/20.500+300/21.000+200/21.500+100/22.000)= 0.03 + 0.026 + 0.02 + 0.014 + 0.0093 + 0.0045 = 0.1038
  • Total cost / Total BTC = $20.231
Facebook
Pinterest
Twitter