The high volatility in the crypto market demands a dollar-cost averaging approach to investing. This approach offers a better and safe strategy for buying into good projects for the long term. Crypto investors and long-term traders also find it a very effective strategy for building their crypto portfolios, especially in preparation for a possible bull market run.
Dollar-Cost Averaging is an effective way to build a solid position for both new and savvy crypto investors.
What Is Dollar-Cost Averaging?
This term is also known as the DCA strategy, for short. It’s an investment strategy that aims to reduce the impact of volatility on the buying of crypto assets. It involves buying an equal amount of a crypto asset at regular intervals, without considering the price movement.
The interval could be daily, weekly, or monthly. This depends on your goal and expectation.
Who Should use the DCA Strategy?
This golden investment strategy isn’t made for a specific group or level of investors. A beginner, an intermediate, or an advanced skill individual can use the DCA strategy effectively while investing in crypto.
It’s a known fact to successful investors that a good setup or bullish chart, and fundamentals do not guarantee a successful investment. It is about buying low and selling high. It is not about having a quality project in your portfolio. You need to know when to buy (entry) and when to sell (exit) that quality project.
However, timing the market is one of the most difficult things to do in crypto. Dollar-Cost Averaging helps to solve this for long-term investors. It reduces the risk of entering the market at the top.
How does DCA Work?
There are two ways you can use the DCA strategy: you either do it manually or with some automation.
Most exchanges provide a tool that lets you automate this strategy. You can either use the recurring buy or the auto-investing features on these crypto exchanges.
If your option is to do it manually, you have to buy it yourself at each interval.
An example of how dollar-cost averaging works
Alice wants to invest $10000 in a crypto asset called Tatcoin using the dollar cost averaging strategy. She divides her investment money into four equal parts of $2500 each. She sets a weekly interval for her purchase of Tatcoin.
At a trading price of $40, she made her first buy of $2500. The following week, she made a second buy of another $2500. This time, Tatcoin is trading at $35.
In the next two weeks after that, she completed her buys at $25 and $30 per Tatcoin. She now has a total of $10000 invested in Tatcoin in a space of four weeks.
This gives her four different entry prices (40,35,25, and 30). The average entry is the sum of the total entries divided by the number of entries.
40 + 35 + 25 + 30 = 130/4 = 32.5
The Average buy price or entry price is $32.5. This is to say, whenever Tatcoin is trading at $32.5 and above, Alice is without a loss. And with the trading market price at $40, her first buy price, Alice would have made a 25% profit in her investment.
Pros and Cons of Dollar-Cost Averaging
Some of the benefits include:
-It reduces the risk associated with buying at the top.
-It gives a lower cost, that is, buying at a lower price.
– DCA enables you to ride out a declining market.
– It’s an edge over bad timing in the market.
One of the major disadvantages of DCA is that it can reduce your gain in an uptrend market.
Dollar-Cost Averaging is mostly effective in the bear market, as it gives the most gain. Good use of it can yield a very good return over a long time.
Although, this strategy does not completely end the risk associated with investing. It does not promise you a successful return on investment. You still need an in-depth knowledge of the crypto asset you’re putting your hard-earned money on.