Understand the Dollar Cost Averaging strategy and learn how you can apply it to build cryptocurrency investments.
Day trading of cryptocurrencies requires a lot of time to research and analyze. Because of the volatility of digital assets, day trading involves high risks. Investors may lose their capital if the volatility is too high.
Traders need to consider different types of strategies that are less time-consuming and hold less risks. Dollar-cost averaging or DCA is one of the effective strategies which will allow you to acquire wealth if you hold cryptocurrencies for a long time.
The strategy of DCA is about investing equivalent amounts of funds at periodic intervals. Let us understand the DCA strategy in more detail and how to apply it to cryptocurrency trading in this article.
What is Dollar-Cost Averaging (DCA)?
Dollar-cost averaging (DCA) is an investment strategy that helps investors or traders to invest in cryptocurrencies effectively. It is also called a ‘constant dollar plan’. This strategy helps investors to avoid making emotion-based decisions.
People who uses DCA distribute their investments in a predetermined time period. Instead of investing a huge chunk of money on one go, investors choose to spend a predefined amount at regular intervals. They spend the same amount of money on a weekly or monthly basis irrespective of the price changes in the market.
It is a simple yet powerful strategy for people who are planning to buy coins in the crypto market. As they do not have much experience in all the technical aspects of the industry, adopting strategies like DCA will be helpful. Besides new investors, dollar-cost averaging is also suitable for long-term investors.
The DCA provides a proper investment structure and reported to give better results during bear markets.
How to apply DCA Strategy?
To apply the DCA strategy, first decide the total amount of money you want to invest in a particular asset. Instead of investing everything at one go, spread the money out over a set period of time.
For example, let's say you are planning to spend $5,000 on a particular cryptocurrency. To apply DCA strategy, divide the total allocated investment amount into five equal parts. Set it in the automated mediums you use, or if you're doing it manually, a calendar reminder to buy the crypto you want for $1,000 in the subsequent 5 months.
As the price of crypto coins fluctuates, you will be buying different amount of coins. If the price of the crypto coin is $100 in the first month, you will get 10 coins. If the price increases to $200 in the next month, you will get 5 coins. In the next months, if at all the price decreases to $50, you will get 20 coins.
In the case where DCA is not applied and you invest the total amount in the first month, the number of coins you receive will be lesser. It is easier to track and maintain the amount used to buy crypto every month than buying it all in one instance. Without the skills and vast experience accumulated by day traders, this strategy is often adopted by crypto enthusiasts and beginners.
The DCA increases the profitability of your investments by leveraging the downtrend of the market. It avoids making investment decisions based on your emotional reactions like FOMO (Fear Of Missing Out). As a result, it also minimizes the risks associated with crypto trading.
Is DCA suitable for the crypto market?
The DCA strategy originated from the book 'The Intelligent Investor'. It is already practiced in traditional financial markets such as stock trading. Stock market traders often use this strategy to invest in stocks. It is one of the favorable practices of the leading investor Warren Buffet. It is also used by Buffet's mentor Benjamin Graham. DCA is also used by Adam Traidman, CEO and co-founder of BRD, a popular crypto wallet.
The dollar-cost averaging method is the best investment strategy for a highly volatile market like cryptocurrencies. The crypto market can make a lot of profit or lose it all in a short span due to price volatility. Even the prices of the most valuable coins in the world such as Bitcoin ($BTC) and Ether ($ETH) fluctuates frequently.
Conclusion: Start using DCA strategy and HODL
The DCA method is most recommended for retail traders, novices, beginners and those who are just too busy to manage but wants to get into the crypto scene. This strategy, applied by leading investors, requires patience and consistency.
Despite all the benefits of the dollar-cost averaging approach, it is not for everyone. Some people buy the dips and sell the coins when the price is high, mostly for experienced day traders. Others believe in HODL — keeping the coins for a long period of time for profit.