5 min readThe best time to invest may be when the price of an asset seems low, but timing the market - trying to buy at the bottom and sell at the top - is extremely difficult. Even professionals struggle to get it right. However, there’s an alternative strategy, one which promotes a long-term horizon, helps investors manage their emotions, and perhaps most importantly for those seeking exposure to cryptocurrencies, reduces the impact of volatility on returns. This strategy is known as dollar cost averaging (DCA), and in this article we explain how it works and how exchange-traded products allow investors to put DCA into action in the crypto markets.
The theory behind DCA
DCA involves making regular investments at fixed intervals, regardless of the market conditions. The investments may be a predetermined amount or quantity of a given asset, while the intervals are typically monthly. The principle behind this strategy is when prices are high investors buy a smaller quantity of the asset, and when prices are low they buy a bigger quantity. Theoretically, they end up holding more of the asset at a lower average price.
One of the main benefits of DCA is it reduces the impact of volatility on returns, making it an effective strategy for cryptocurrencies which are among the most volatile assets in the investment universe.
To put these market fluctuations into context, take a look at the chart below showing the price action of Bitcoin between 2015 and 2023.
Bitcoin’s trajectory has been anything but steady. During the bull market in 2017, it rallied to nearly $20,000, powered by the introduction of Bitcoin futures by the Chicago Board Options Exchange (CBOE). This trend reversed at the start of 2018 after Japanese exchange Coincheck lost $530 million in a hack, and Facebook and Google banned ads for initial coin offerings (ICOs) and token launches.
The next bull market occurred in 2021 when wider adoption by institutional investors and high-profile brands like Tesla propelled Bitcoin’s market capitalization past $1 trillion for the first time. The price dipped in the summer of 2021 amid concerns about the environmental impact of mining Bitcoin, before recovering to hit a record high of $68,000 towards the end of the year. But another bear market followed, this time triggered by the collapse of TerraUSD (USTC), a stablecoin which lost its peg to the US dollar.
Managing volatility isn’t the only benefit offered by DCA:
It helps to eliminate the influence of emotions on investment decisions. For instance, during a bear market investors may sell holdings to minimize losses and hold cash until the market recovers, even though a downturn often presents a good opportunity to buy assets at a discount.
DCA is a suitable strategy for investors who believe an asset could deliver returns over the long term. As the adage goes, time in the market is better than trying to time the market, especially if an investor can capitalize on low prices. Research shows that staying invested increases the chances of generating a higher return.
It’s worth noting that DCA has potential downsides too. Firstly, in a steadily rising market investors may miss out on returns because of the opportunity cost of holding cash rather than putting it to work. Secondly, DCA can be more expensive than investing a lump sum due to higher trading fees.
DCA simulation
To demonstrate DCA in action, let’s compare the performance of regular Bitcoin investments over five fictional months with a lump sum investment at the start of the first month.
In the first scenario, Bitcoin is volatile, so the DCA approach generates a better return.
As Bitcoin rises steadily in this second example, investing a lump sum would have been a more effective strategy.
How can ETPs ease the process of DCA in crypto?
Exchange-Traded Products (ETPs) are a type of financial instrument that give holders exposure to an underlying asset without having to own it. They’re traded on stock exchanges just like shares, making them easily accessible. Examples of ETPs include exchange-traded funds (ETFs), exchange-traded commodities (ETCs) and exchange-traded notes (ETNs) - learn more about the differences between these products in our dedicated article.
ETPs come in two forms: physical and synthetic. Physical ETPs hold the asset they track, while synthetic ETPs use swap agreements to track the performance of the underlying asset.
ETPs provide exposure to a broad range of financial assets, including crypto. Crypto ETPs are already well established in Europe- as of 2022, there are 166 products on the market. These products are supervised by the European financial authorities and subject to regulations governing exchanges, so they must adhere to the same accounting, disclosure and transparency rules as ETPs tracking mainstream financial assets.
The main benefit offered by crypto ETPs is they make it much easier for investors to gain exposure to the crypto markets, either when dollar cost averaging (for instance, as part of a broker’s savings plan) or investing a lump sum.
The crypto ecosystem can seem intimidating. Investing directly involves navigating different exchanges, some regulated and some not, depositing funds and then deciding on the most secure place to store the tokens, for example on an exchange or in a hot (online) or cold (offline) wallet. Some pooled funds offer exposure to crypto, but they tend to charge high fees.
However, investors can buy crypto ETPs through a traditional bank, broker or investment platform. They can hold these products in a portfolio alongside mainstream financial assets, which makes it easy to compare performance. And if the value of the underlying crypto rises and changes the portfolio’s weighting, rebalancing is simple. Incidentally, CoinShares Physical ETPs are backed completely by crypto stored by Komainu, a digital asset custodian regulated by the Jersey Financial Services Commission.
To summarise, DCA is a useful strategy for investors seeking exposure to a volatile asset class, so it’s suitable for accessing crypto. To avoid the complexity of trading on a digital exchange, investors can purchase crypto ETPs through banks, brokers and investment platforms and hold them in a portfolio alongside mainstream financial assets.
Learn more about CoinShares’ range of crypto ETPs.