Investing in cryptocurrency comes with a range of high- and low-risk options. Whether you’ve gained years of DeFi experience through an exchange like Vauld or are just entering the market, dollar-cost averaging crypto is an effective way to strategically earn more.
Continue reading to learn more about how dollar-cost averaging works, what its benefits and disadvantages are, and the best practices to make the most of this opportunity.
What Is Dollar-Cost Averaging Crypto?
Dollar-cost averaging is an investment strategy that entails investing a predetermined sum of money in increments rather than in one lump sum. In doing so, you mitigate your risk, avoid emotion-based activity, and benefit from downturns in the market.
The values of cryptocurrency are volatile and impossible to predict. Through dollar-cost averaging, you are actively offsetting negative impacts on investments that occur as a result of short-term market volatility.
This is especially beneficial for crypto beginners. Since funds are dispersed across intervals that are determined by you, your purchase prices tend to stay balanced rather than fluctuating during an investment period.
In an environment where many investors overthink whether a certain time is right to enter the market, dollar-cost averaging offers a simple solution.
Let’s look at the benefits and disadvantages of dollar-cost averaging crypto.
Pros Of Dollar-Cost Averaging Crypto
Offers Low-Risk Investing
When the market takes a sharp downturn, it’s not uncommon for investors to stress out a bit. For anyone dollar-cost averaging crypto, however, there are benefits to be had from these market corrections.
During a market correction, a token will see a moderate decline in value. Purchasing during this decline is known as “buying the dip” and is an opportunity to buy the token at a lower price, hoping it will rebound to its original value. In a sense, it is bargain hunting for crypto investors.
A concern surrounding this strategy, however, is that “dips” are not guaranteed to rise back up in value. This is known as “catching a falling knife” and can be detrimental to your investments.
Dollar-cost averaging aims to mitigate this risk by spreading your funds out across multiple investments. So, even if one asset does poorly, your portfolio is diversified enough to spread out your investment cost and lower your overall risk.
Avoids Market Timing
Along with reducing risk, averaging also reduces time spent trying to time the market.
Market timing involves the redistribution of investment funds based on predictions. In most cases, these predictions are influenced by data charts and technical analysis readings. The goal is to profit from perfectly timing trades based on the ups and downs of the market.
The problem that many investors encounter while using this strategy is that it can be incredibly time-consuming and hard to master. Some investors and economists go as far as to say that it is impossible.
In short, market timing is extremely challenging and highly technical. But averaging lets you progressively build your wealth and focus on investing for the long term.
Prevents Emotion-Based Trades
Trying to time the market can be difficult enough without worrying about how the media could influence decisions. Another benefit of averaging is that it helps emotionally detach you from your investment.
Especially with so many well-known names engaging in decentralized finance, it’s hard to tune out the noise of others telling you to buy or sell. But with averaging, it’s easy to avoid the fear of missing out to maintain a steady investment strategy.
Cons Of Dollar-Cost Averaging Crypto
Less Risk, Less Reward
Much like any investment, dollar-cost averaging is not without its risks — or in this case, a lack thereof. Since this strategy is a lower-risk option, the rewards are not as high as a lump sum investment may be.
You also risk missing out on high returns if the investment progressively rises after the initial investment period. Due to these factors, it’s critical to do your research before buying into an investment.
Another thing to consider before opting for this strategy is that dollar-cost averaging tends to have more associated fees. Crypto exchanges that offer this option will often charge a percentage per transaction.
Since these fees can quickly add up, it’s best to research your crypto exchange before partnering with them to avoid overpaying. For example, here at Vauld, we have no hidden fees, and our maker and take fees average a competitive 0.1%.
Along with considering fees, there are several ways to offset these disadvantages to maximize the benefits. Next, we’ll look at the best practices for dollar-cost averaging.
Best Practices For Dollar-Cost Averaging
Assess Your Options
Averaging is not for everyone. Before getting started, it’s important to analyze your risk level, skill level, and whether other opportunities may be more suitable.
If you have a detailed knowledge of technical analysis or if you’ve identified an excellent time to enter a market, then you may not feel comfortable having limited control over your investments.
In this case, a lump sum strategy may work more effectively for you.
Research Your Token
A misconception of dollar-cost averaging is that profit is a steady but sure thing. However, this can sometimes be far from the truth.
Researching the tokens you decide to average is a critical part of the investment process.
Some important questions to ask include:
- Who is the team responsible for the token’s creation?
- Is there a whitepaper on the token?
- Is the whitepaper clear in explaining the token’s purpose?
- What is the token’s value history?
- What is the public opinion of the token?
- Has the token been available for a while or is it new to the market?
These questions will help get you started and avoid potential crypto scams or get-rich-quick schemes. A suitable investment option should always have satisfactory answers.
Develop Your Strategy
Next, you’ll want to figure out how much to invest each month and the timeframe of your investment.
Developing this strategy can be as simple or as thought-out as you want. Just be sure to set up a monthly transfer to your exchange account for the allocation of funds.
An example of how you might structure your dollar-cost averaging investment is deciding you’d like to invest $300 each month. Using this amount, you can invest $50 in Ethereum, $50 in Bitcoin, $50 in Litecoin, and $150 in DAI for a variety of volatile crypto and stablecoins.
Automate Your Purchases
The best way to make the most of your investments without dedicating too much of your time is scheduling them to be made automatically over time or based on certain conditions.
At Vauld, our Automatic Investment Plans (AIPs) do exactly that. For example, plans can be set up to buy crypto assets on a daily, weekly, or monthly schedule or when the price of an asset dips by 2-10%.
AIPs divide up the investment amount across regular intervals and reduce the impact of volatility on the purchase price. There’s no need to time the market, as this feature is completely customizable for the long-term growth of your crypto portfolio.
Our “Buy The Dip” feature checks the current price of a token or basket of tokens against the price 24 hours ago. If the current price dips by a preselected percentage, the AIP triggers a buy order, saving you time otherwise spent navigating order books.
Choose The Right Exchange
Choosing the right exchange helps you automatically invest while avoiding high costs in fees. Certain exchanges, like Vauld, will also allow you to earn interest through AIP investment assets if they are eligible to do so.
Since no two exchanges are alike, it’s helpful to look for a few features that will benefit you most. These features include:
- Multiple earning options, such as fixed deposits and trading
- Competitive interest rates for earning and borrowing
- An arsenal of security features
- An extensive list of tokens to choose from
- A verifiable list of venture-capital partners
- No hidden or outrageous fees
- Excellent customer service
- Compounded interest and weekly payouts
Once you’ve found the best customer-focused exchange, the rest is easy. Whether you’re trading, selling, buying, investing, or borrowing, the right exchange will make all the difference during your crypto endeavors.
Invest Better With Vauld
Dollar-cost averaging crypto is well-suited for investors just starting in the DeFi market, but this does not mean that experienced traders cannot take advantage of the long-term growth opportunities associated with it as well.
To know whether this option is right for you, consider how comfortable you are with varying levels of risk and volatility, weigh its pros and cons, and learn the best practices for averaging.
At Vauld, we offer the essential tools for you to make the most of all your strategies. You gain access to competitive rates, an extensive list of tradable assets, interest earned while trading, zero hidden fees, and much more.