Dollar-cost averaging (DCA) is a strategy where you as an investor invest a total sum of money in small increments over time instead of all at once. The goal is to take advantage of market downturns without risking too much capital at any given time. Makes sense? Good!
Why DCA & how does it work?
DCA is designed to help offset any negative effect on an investment caused by short-term market volatility. If the price of an asset drops during the time you are dollar-cost averaging, then you stand to make a profit if the price moves back up.
If you’re not a professional market watcher, DCA can save you the effort of trying to time the market to get the best crypto prices. It’s a tool for investing slowly and consistently that aims to protect against the human tendency to want to gain all at once. We've all experienced that, haven't we?
With dollar-cost averaging, you first decide on the total amount you wish to invest, along with your chosen investment asset, like Bitcoin. Then, instead of investing the money as a lump sum, you invest it in smaller equal installments over a specific length of time.
Committing to dollar-cost averaging means that at times, you’ll be investing when the market or a particular asset has dropped in value. It also means there will likely be times when you’re buying during a market sell-off — in which a huge volume of assets sell in a very short period. Some investors might be reluctant to purchase assets during bear markets. For more info on bear and bull markets, read our blog on it.
But from another perspective, buying when the market is down gives you the opportunity to land potentially profitable assets. By buying when others might sell, dollar-cost averaging can potentially help you to reap the benefits of buying low and selling high.
Is DCA a profitable crypto strategy?
We're not at liberty to answer that question, BUT the strategy is much like placing an order for a recurring buy on a cryptocurrency exchange like ChainEX. Cryptocurrencies can be quite volatile, oftentimes even more so than stocks.
You can generate a potentially greater profit from buying during dips and selling at the top according to professional analysts and traders. However, there’s a broad consensus that DCA is a safer overall method of investing than lump sum buying and selling. It’s lower risk and lower reward, but still offers the chance of benefiting from market swings. Does that answer your question?
With the wild swings that have occurred in the crypto market during its relatively short existence and its potential for future growth, holding digital assets has been, and may continue to be, a profitable means of investing as history has proven. If you want a relatively safe way of benefiting from crypto’s volatility, a dollar-cost averaging strategy is worth considering.
Investors who use a dollar-cost averaging strategy will generally lower their cost basis in an investment over time. The lower cost basis will lead to less of a loss on investments that decline in price and generate greater gains on investments that increase in price.
Why should you use DCA?
The key advantage of dollar-cost averaging is that it reduces the effects of investor psychology and market timing on your portfolio.
By committing to a dollar-cost averaging approach, you avoid the risk that you will make counter-productive decisions out of greed or fear, such as buying more when prices are rising or panic-selling when prices decline.
Instead, dollar-cost averaging forces you to focus on contributing a set amount of money each period while ignoring the price of each individual purchase.
How to keep up with the whales
Whales are smiling right now at the price fluctuation of crypto. I mean, why not? They have multimillion dollar funded accounts. The average investor however, might not be as enthusiastic. This is where DCA comes in.
Analysis shows that instead of day trading and attempting to time the market bottom, dollar-cost averaging (DCA) is the best method for retail investors like you looking to build long-term profits in both traditional and crypto markets.
Fun fact: In 2020, Coin Metrics pointed out that investors who dollar-cost averaged into BTC starting from the December 2017 peak were still in profit three years later. (Source: Cointelegraph)
There's a lot to cover where Dollar Cost Averaging is concerned. All of which we'll cover in later topics
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There is no such thing as a 100% safe investment, and each decision has its risks. In any case, it is up to you to decide. All content and topics covered are mere opinions and do not constitute investment advice. Trading and investing in Bitcoin or any cryptocurrency carries a high level of risk. We do not assume any responsibility for actions taken upon reading any of our articles. ChainEX is not a financial advisory firm, investment manager, or financial consultant.