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?
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?
A DCA strategy’s significant advantage is removing emotions and timing from the investment strategy.
Emotions and timing are two crucial factors challenging to master when it comes to investment decisions.
Time in the market VS Timing the market
One common mistake by newbies is to try to time the market but to be successful one needs to trade against the community.
How to Setup a DCA Into Crypto?
Many people dream about financial freedom since they believe you don’t have to think about money. However, a financial portfolio needs to be regularly reviewed, updated, and reconstructed.
Two important parameters are to be set to manage a successful DCA strategy for crypto.
- Buy at regular intervals
- Buy with the same amount every time
Buy at regular intervals
It’s essential to buy at regular intervals if you want to apply a successful DCA strategy over a long-term period.
Some people would argue that you can buy with a tighter interval if there is a sudden, unexpected, and unmotivated bear move in the market.
However, by doing this, you introduce emotions and quick decisions, making deviations from your developed investment strategy.
This is why many people fail with financial investments, they think they can outsmart the market.
Buy with the same amount
It’s essential to buy with the same amount every time.
Of course, some people argue that it’s possible to buy with larger amount at some times and a smaller amount on other occasions.
Yes, this is possible, but you introduce emotions and other variables into your strategy. Remember, a pure DCA strategy’s key advantage is removing emotions from investment decisions.
Mitigate Risks with Dollar Cost Averaging In and Out
A perfected implemented DCA strategy for Bitcoin 2017-2022, graph from Coingecko. Green dots symbolize buying occasions and red dots sell occasions.
The above graph shows the actual BTC/USD from 2017-2022.
You can both DCA into Bitcoin and DCA out from Bitcoin. Green dots symbolize buying opportunities, and red dots sell occasions.
For cyclical assets appreciating in price for during a certain season or time period DCA in/out is a perfect strategy.
However, for Bitcoin, DCA might be the best option since Bitcoin is an asset that appreciates over time.
In addition, every sell creates a taxable event and might even reduce the number of Bitcoin you own.
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.
- You buy Bitcoin in Sweden for 10.000 SEK = $1.000 = 0.1 BTC
- Bitcoin price goes up to $20.000/BTC, and your 0.1 BTC for $2.000 with a 100% profit.
- 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%.
- 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.
- 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.
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.
- BTC price $20.000
- BTC price $19.000
- BTC price $20.500
- BTC price $21.000
- BTC price $21.500
- 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
- BTC price $20.000, buy with $600
- BTC price $19.000,buy with $500
- BTC price $20.500, buy with $400
- BTC price $21.000, buy with $300
- BTC price $21.500, buy with $200
- 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