There are many strategies that investors use when investing in cryptocurrencies. These strategies depend on the investor’s financial capacity and investment goals most times.
Some are automated while some are manual, but some are more popular than others. One of the most popular is dollar cost averaging (DCA).
In this guide, we discuss what dollar cost averaging is, how it works, its pros and cons, which should help you to decide if you wish to use it in your investing or not.
What is Dollar Cost Averaging?
Dollar cost averaging is a simple, beginner-friendly investment strategy in which an investor makes small, regular scheduled investments in crypto or any other asset. This investment is done over a period of time, rather than all at once.
The strategy helps you reduce the impact of short-term volatility as you continue to invest small amounts at a time at regular intervals.
All an investor needs to do is to come up with a plan to purchase a fixed fiat amount of a particular asset at a predefined interval.
For example if you wish to invest $1,000 in Bitcoin, you can commit to buying like $50 worth of Bitcoin on a fixed date every month for 20 months instead of buying $1,000 worth of Bitcoin all at once.
Why DCA is Important
Unless you’re a full time and seasoned trader, it can be hard to accurately predict market cycles – the transition from rising prices to falling prices.
These cycles determine when to buy and when to sell and if you can’t accurately predict them, you are likely to take the wrong action at the wrong time, leading to avoidable losses,
This is where DCA comes in. Instead of pursuing quick investments with short-term gains, you can adopt a longer term investment strategy, which uses DCA to bypass these cycle recognition challenges.
Because you invest fixed amounts at regular intervals, the effect of the cycles cancel out and you can emerge successful over the long term, regardless of what happens in the short term.
DCA also removes harmful emotions that make investors take crazy decisions at times of wild market movements, if you stick to the plan.
Because it addresses the concerns around volatility and market cycles, DCA is particularly suitable for crypto investing since the market is particularly wild when it comes to volatility.
In times of falling prices, the strategy can lead to reduced losses as well as increased gains in bullish times.
Why Use Dollar Cost Averaging
One of the main reasons you should use DCA is because of its simplicity. It isn’t an investment strategy that requires any level of superior investing knowledge.
This makes it ideal for beginners who are just entering the crypto space with long-term investment in mind.
Also, some crypto platforms can automate the process for you with a feature called recurring buys. Once set up, you can forget about it and the system will continue to buy the asset at the fixed interval on your behalf.
Also if you’re an investor who believes in the future of a crypto asset and wish to invest for the long term, DCA is a perfect option as it can bring significant returns if followed consistently for many years.
Pros of Dollar Cost Averaging
DCA has many advantages that make it superior to one-time investing. The following are some of those advantages.
- Helps mitigate the impact of short-term volatility
- Eliminates emotions that affect investment decisions
- It can significantly reduce losses and boot gains over a long time.
Cons
The following are some of the cons of DCA, which may be easily ignored but you should know about.
- It can cause you to miss out on some short-term opportunities to make profit
- It may lead to purchasing of fewer units of an asset overall
- It can be difficult to stick to the plan for a long time
