Dollar-cost averaging explained: building crypto positions over time with regular buys

Dollar-cost averaging (DCA) is an incredibly effective but oft-overlooked strategy when building a crypto portfolio. It's a simple and easy way for anyone interested in crypto markets to build positions while minimizing risk and emotional responses to market volatility.

Emotions, be they fear or overconfidence, can easily overwhelm the most experienced of traders — especially in volatile markets such as crypto. For example, Bitcoin’s price falling significantly over a short period should, in principle, represent an enticing opportunity for those with long-term conviction. However, uncertainty often pressures traders to make the exact opposite decision, and many sell at prices nearing potential bottoms. Similarly, when the price of Bitcoin surges, those who sold their holdings near the bottom may be enticed to buy in again, often at much higher valuations.

DCA removes such emotional human decision-making from the buying process. Those following this strategy make buys at regular intervals rather than spontaneously based on market optimism and their emotional state. In this article, we’re focusing on the dollar-cost averaging strategy. You’ll learn what it is, why it’s popular, and how to increase your chances of long-term portfolio appreciation by using it. Finally, we consider how to create and execute a basic dollar-cost averaging strategy here at OKX with our DCA trading bot.

What's dollar-cost averaging?

Dollar-cost averaging is a strategy that buyers with a strong belief in an asset’s future price appreciation can use to build a position over time. Rather than saving and building positions with a lump-sum, those who employ a DCA strategy instead make many smaller purchases at regular intervals. This happens whether the asset’s price goes up or down.

A simple example of “DCAing” would be if Maxwell, seeking a long-term BTC position with $1,000, set a schedule to buy $100 worth of BTC each week, irrespective of the price.

Maxwell’s strategy mitigates the risk of making a large buy at an inopportune time. Because his incremental buy orders are smaller than a lump-sum buy, declining prices shouldn’t be as likely to prompt an emotional response. Instead, lower prices represent a more attractive entry point for Maxwell’s next scheduled buy.

Many retirement plans around the world use a form of dollar-cost averaging. For example, a 401(k) plan in the United States involves an individual allocating a part of their paycheck to various assets at regular intervals, regardless of recent price action.

DCAing is a powerful strategy and is popular among different types of traders, including:

• Beginner traders who might lack technical chart-reading skills to time entries based on recent price action.

• Traders with strong, long-term conviction in an asset’s future performance and appreciation.

• Those seeking to reduce the influence of emotions on their decision-making.

• Traders who have a set amount of capital and want to maximize its effectiveness in a volatile market.

• Traders who might not have access to a lump sum of capital to take a sizable position but have a regular income source — for example, from employment.

Illustrating the power of DCA: a BTC example

Although it’s an incredibly simple strategy, DCAing has consistently proven rewarding in volatile markets like cryptocurrencies. The following example should illustrate the power of dollar-cost averaging.

Adam is bullish on BTC and has $1,500 with which to take a position over the next three periodic buys. He decides to purchase BTC over the next three alternate Tuesdays and plans to make his first buy on Aug 29, 2023. Unfortunately, he decides to enter the market on a day when Grayscale wins a lawsuit against the US Securities and Exchange Commission. This causes Adam's entry price to range from $25,925 to $28,163.50. Thereafter, the initial excitement behind the announcement wanes, and BTC's price tumbles more than 9% over the next two weeks.

Unphased by the sudden decline in BTC prices, Adam sticks to his DCA plan and makes his second DCA buy for BTC on Sep 12, 2023. In a stroke of good fortune, Adam manages to ride the rally up as a bullish-engulfing candle sends BTC prices soaring 5% on the day itself before closing at $25,843.70. This causes Adam's BTC entry price to range from $25,135.50 to $26,585.30. For Adam's final DCA buy, he follows his DCA plan and makes a recurring buy on Sep 26, 2023. On this day itself, BTC prices remained relatively stable, with its price fluctuating between $26,083 and $26,400.

Let's take the highs and lows for each day and use the entry price as the corresponding price for each of Adam's BTC DCA buys. The table below calculates Adam's average BTC entry price assuming Adam spends $500 with each Bitcoin DCA purchase.

Although a DCA strategy doesn't always guarantee greater profitability than lump-sum buying, Adam has managed to achieve a lower entry price than if he had decided to proceed with a lump-sum buy on Aug 29. Ultimately, it's this example that makes dollar-cost averaging look like an appealing strategy to build a position in a buyer's long-term portfolio.

On the other side of the argument, it’s important to recognize just how difficult it'd be to make lump-sum buys during major crashes like March 2020. BTC’s price crashed from more than $10,000 in February 2020 to well below $4,000 in mid-March. With just about every global market tanking, making long-term buys in such conditions would require absolute emotional detachment and unbreakable confidence in BTC’s future price performance. Few traders, if any, are capable of timing the market with such conviction and accuracy.

Why is DCAing Bitcoin popular?

Cryptocurrencies like BTC are often highly volatile. It's common for the BTC price to increase or decrease by double-digit percentages over a short time. For traders, volatility represents an opportunity to growth. Leveraging various strategies, they try to exit a cryptocurrency position at a higher price than they entered it. However, for long-term buyers, volatility can be frustrating. Imagine you'd worked hard to make a sizable buy for such an asset only for its price to tank 40% or more over the following weeks. After watching a meaningful long-term trade lose much of its value, it can be tough to remain committed to your position, and thus many are tempted to sell at a loss.

Dollar-cost averaging mitigates this risk. When spreading multiple buys out, the buyer might still buy close to the local market top. However, they'll also increase their position at more favorable entry points during later periods of declining prices.

Moreover, since DCAing uses time rather than price to determine when a trader buys an asset, it can be a much less labor-intensive buying method. There's no need to study price history charts to select an entry point. This makes dollar-cost averaging popular among novice traders, as well as those who might not have the time to commit to heavy market analysis.

Finally, dollar-cost averaging is useful for those with a regular source of income. They budgeted to have around $100 in spare cash at the end of every month. Rather than saving up and risking making a poor entry, a DCA strategy will average out their entry price over time.

Benefits of DCAing for crypto traders

Crypto DCAing can be a great way for crypto traders to improve their portfolios and reduce timing risk. This method of trading involves spreading out purchases of an asset over time in order to reduce the impact of price fluctuations. Here are some of the advantages that DCA offers crypto traders:

Lower entry cost

One benefit of using Crypto DCA is that it reduces the amount of capital required to start trading. Instead of making one large purchase, you can spread out your purchases over time with smaller amounts. This makes it easier for beginners or those with limited funds to get involved in the market without feeling overwhelmed.

Volatility management

Another benefit is that DCA helps you manage volatility more effectively. By buying small amounts regularly, you can ensure that no matter what happens in the market, you will have some exposure to it, and in return, minimize downside risk during periods of decline. In addition, DCA allows you to take advantage of opportunities when prices dip and maximize returns when prices rise.

Automation and time savings

Finally, Crypto DCA also allows traders to automate tedious tasks such as setting up recurring transactions and monitoring the markets 24/7, so they don't miss out on any potential gains or losses. This saves both time and energy as manual operations are eliminated from your trading strategy while gains are still maximized.

By taking advantage of dollar-cost averaging strategies like crypto DCA, buyers can diversify their portfolios across different assets while reducing the stress associated with trading decisions. Additionally, they can save money by minimizing fees and commission while gaining insight into where they should focus their efforts regarding optimizing their portfolio performance.

Risks of DCAing for crypto traders

Unfavorable entry price

Crypto traders should be aware of the risks associated with DCA when building their crypto portfolios. One risk is that if the market moves quickly, you may end up purchasing an asset at a less favorable price than if you'd purchased it all at once. Additionally, there's a chance you could miss out on a better entry point if the price of an asset increases significantly before your purchase is completed.

Additional transaction costs

Another risk associated with DCA is the additional costs, such as transaction fees and commission, which can reduce your potential gains. Meanwhile, you must monitor the market regularly to take advantage of any buying opportunities. Finally, this strategy may not be suitable for all traders depending on their risk tolerance and goals.

Ultimately, understanding the risks involved in DCA helps traders make an informed decision about whether or not this strategy is right for them. While it may not be suitable for everyone depending on their individual circumstances, those who are willing to commit to watching the market regularly may find DCA to be a valuable tool in building their crypto portfolio.

How do OKX's DCA trading bots work?

Before diving into the specifics of executing a crypto DCA strategy, it's key to first understand why you might want to consider using our DCA trading bot. OKX provides several DCA bot strategies to cater to traders' varying needs and preferences. For those ‌with higher convictions, we offer the Spot DCA (Martingale) and the Futures DCA (Martingale) bots. Both of these trading bots use the Martingale strategy, which involves doubling down on positions after losses.

If you prefer a more traditional DCA approach, OKX also offers the recurring buy bot. Rather than employ a double-down approach, the recurring buy bot uses a straightforward DCA strategy that automatically purchases a predetermined order size at regular intervals. These orders happen regardless of market conditions and asset prices. This strategy is useful for traders who want to gradually accumulate a position in a particular cryptocurrency.

When it comes to deciding between using the DCA martingale bots or the recurring buy bot, it ultimately comes down to personal preference. Recurring buy bots will deploy a fixed amount in an asset at fixed intervals regardless of market movements. Conversely, the DCA Martingale bots allow for greater flexibility in the buying prices, since orders can be triggered when the price drops by a fixed percentage and selling orders can be triggered when the market recovers and reaches your take-profit target. For more information about the DCA trading bots we provide, check out our in-depth guide to our DCA trading bots.

How to dollar-cost average at OKX with DCA trading bots

Unlike other trading bots that involve complicated interfaces, it’s easy to dollar-cost average into BTC or other crypto assets with us. To start, first locate the "trading bot" button on OKX's navigation bar and select your preferred DCA trading bot.

Then, you can begin the set-up process by choosing from the different AI strategies. Unsatisfied with the pre-set parameters? Tweak the fields to change things like how often your entries are triggered and the margins for take-profit targets, as per the martingale strategy. Once done, confirm your order by inputting the amount that you're comfortable trading with for the bot.

Features wise, our unique AI strategy will present you with pre-set parameters that are determined by the risk profile you've selected. These parameters are tailored to those with varying risk appetites and will impact the frequency of trades being made. For traders with additional technical analysis knowledge, they may opt for their trigger entries to be based on technical indicators like the relative strength index.

For more information on setting up your crypto DCA strategy with our trading bots, read our guide, which introduces DCAing with our spot trading bot and explains the various trading cycles involved with DCAing. Meanwhile, the DCA calculator found here is a useful tool for testing your strategies.

The final word

Dollar-cost averaging is one of the least risky and most accessible methods of establishing a long-term position. If you’re planning to hold a digital asset for a long period, DCAing is a very effective way to build a position without risking large amounts of capital all in one go. As Bitcoin is the coin with the largest market cap at this time of writing, it might be the most popular option for traders to DCA into for the long haul as they‌ believe BTC is likely the safest digital asset and will appreciate with the rest of the crypto market in the long run.

However, it’s important to remember that any strategy carries some risk. For example, while dollar-cost averaging is an effective way to take a position in a market, you will still lose money if the asset’s price never increases more than your average entry price. It's therefore important to do your own research and due diligence before starting. After all, the decision to DCA depends on your personal risk profile and portfolio goals over time.