Dollar-Cost Averaging (DCA) – Is This Strategy Suitable For Cryptocurrency Investing?
In this article, we shall be talking about dollar-cost averaging (DCA). Dollar-cost averaging may be understood as a viable investment strategy that is utilised by numerous traders worldwide, and it readily includes the spreading of purchases across various intervals which have been pre-defined regardless of individual prices. Simply put, dollar-cost averaging is a method that many traders use on an everyday basis to remove the emotional factor regarding the act of investing. This in-depth article will thus serve as a guide that will tell you everything you need to know about DCA.
However, one of the biggest questions regarding dollar-cost averaging is whether it can be used with the cryptocurrency market in particular. This dollar-cost averaging article will therefore tell you all that you need to know about the process as well as whether it is indeed applicable to cryptocurrencies. For that reason, it is recommended that you read till the very end in order to ascertain as to whether this is a viable strategy for you in particular, as well as how you can stand to benefit from it.
One thing that you should keep in mind while reading through this article is the fact that although the dollar-cost averaging investment strategy may indeed prove to be quite beneficial, the ability to use this method effectively will also largely depend on a number of different factors associated directly with the traders themselves. What this means is that traders would hence be able to use this strategy much better when they have the knowledge, skills, expertise, capacity and overall experience needed to use DCA properly.
Understanding DCA
Dollar-cost averaging is, of course, just one example of many different types of viable investment and trading strategies that one could take a look at in this day and age. However, in this article, we will be primarily concerned with dollar-cost averaging, as previously mentioned, and that is where the main focus will be. However, what exactly is dollar-cost averaging and more importantly, how can you utilise it in order to maximise your potential gains?
Well, simply put, this is a popular investment strategy that is specifically designed to help you accumulate wealth over time in what is otherwise known as passive income. It is an investment approach that involves periodic purchases of various assets, which eventually removes the requirement for timing markets. This can all seem a little bit confusing, so, once again, it is very important to understand what DCA is prior to getting involved with it.
To put it another way, dollar-cost averaging may be understood as a type of investment plan which assists traders and investors in terms of eliminating and removing emotion-based decisions. You see when it comes to dollar-cost averaging, investors and traders alike all work to try to mitigate the effects pertaining to price volatility through the spreading of purchases across various predefined intervals.
This is a much better approach as compared to investing an accumulated sum into any kind of asset class as the trader would then instead choose to invest an amount that will be fixed on a weekly, monthly or perhaps even a bi-monthly basis. This would also be done irrespective of whatever changes in price might take place. You may hence think of dollar-cost averaging as a trading strategy that is a viable method of navigating through a market that is highly volatile without the need to think about what the best entry point may be as the capital would be spread across various predefined intervals.
This trading and investment method would then effectively ‘smoothen’ your purchase prices and make everything easier over the entire duration of your investment. Many traders all across the globe would agree that this strategy is hence superior to any other one, which would involve simply investing a large sum at any given asset’s peak price. Essentially, it can therefore be said that dollar-cost averaging is a viable as well as a suitable and effective investment strategy that can be used by both beginners as well as advanced traders alike.
Furthermore, this strategy is particularly useful for those traders who do not wish to burden themselves with understanding and studying the different technical aspects pertaining to market analysis, and it is hence also suitable for those that are brand new to the industry. However, with that being said, it is once again recommended to have some semblance of understanding regarding trading, and you should thus never go into it completely blind or clueless.
Who is DCA for?
As previously alluded to, there are all kinds of viable investment and trading strategies that you can take a look at these days, and so it can often be difficult to know exactly which strategies are applicable for what kinds of investors and traders. With that being said, dollar-cost averaging, in particular, would normally be ideal for those investors who operate on a long term basis. This is because the aim of dollar-cost averaging is to adhere to a specific investment cycle wherein a fixed amount would constantly be invested in any given asset.
As such, there is absolutely no room for fear, greed, anxiety, doubt or any kind of other emotion which are often associated with short term investment and trading strategies. Additionally, it is also worth pointing out that dollar-cost averaging tends to be much more effective and efficient in a bear market. This is because, during a bear market, a majority of investors would be too scared to make any kind of big purchases as then they would always be wondering about whether they are too late or too early to take advantage of an investment opportunity.
The dollar-cost averaging plan which would have been put in place by you would thus offer you a viable investment infrastructure and trading framework for essentially ‘buying the dip’. These are the main fundamentals of dollar-cost averaging, and it is very important that you thoroughly understand these before getting involved with this trading strategy. It would also help to have a basic understanding of trading and its corresponding terminologies, concepts and subjects beforehand, which involves key terms such as ‘buying the dip’.
The process
Now that you have a firm grasp on the basic fundamentals pertaining to dollar-cost averaging, it is also similarly very important to understand the different kinds of effects that this kind of investment strategy can potentially have. You see, before diving headfirst into all of the technicalities involved with dollar-cost averaging, it is critical to try and understand all of the different possible and potential outcomes which could occur. This will, in turn, help you avoid suffering substantial losses and will assist you in becoming a more advanced trader.
For the purposes of this article, we shall be using a few examples to help get our point across. So, for instance, let’s suppose that a trader chooses to invest a big sum of $1,000 into any given asset, which would be worth $50 per share. In this situation, the trader can then purchase 20 shares through one purchase. However, the question does arise as to what would happen if the trader would have decided to sell when the price may be higher or lower, as is the case when the price may go to $40, $60 or perhaps even $80.
You see, when the price goes to $40, the profit would be negative $200 (in other words, a loss of $200), when the price goes to $60, the profit would be $200, and when the price goes to $80, the profit will be $600. You might have noticed a pattern here, and whatever the case may be, it is very important to remember what the initial buying price was, as this will mean the difference as to whether you will experience a profit or loss.
This is also applicable to any kind of investment strategy, and it is something that you thoroughly need to understand before you get involved with any kind of investment, cryptocurrencies or otherwise. As such, when we take into consideration the abovementioned example, it becomes clear to see that the big sum strategy would only work best whenever the trader in question has identified what the best opportunity and time would be in order to successfully enter a market to derive a profit.
This will inadvertently also imply that the trader would have to decide when would be the right time to sell. At this point, it is also worth pointing out that there might not ever be a ‘right time to sell as the price may often fluctuate. This is particularly true for cryptocurrencies, as the cryptocurrency market tends to be highly volatile and often unpredictable. With that being said, many traders may thus tend to wait too long in order to sell or might even sell too quickly, which would not lead to the desired result wherein the trader would be able to profit as much as possible.
As such, it is recommended that you conduct your own research and know what you’re getting into, as well as be able to understand the basic fundamentals of the market and technical analysis beforehand, which will enable you to know exactly when the right time to sell would be in order to get a sizable profit.
DCA in a bear market
As dollar-cost averaging investing would normally be a continuous buy plan, traders would hence normally be required to spend their respective $1,000 capital over various multiple purchases. For example, a trader may have a DCA plan for purchasing an asset over a time period of four months. To put it another way, the trader would then set aside $250 on a monthly basis. In such an event, maybe the price would dip steadily in a way that every predefined interval where the prices would be at, for instance, $50, $35, $30, and $25. In such an event, the initial $1,000 investment capital will then have accrued about 30 shares.
However, it is also worth considering how this strategy would potentially affect your profit in the event that you may decide to sell at the same sell prices. So, if you decided to sell at the price of $40, for example, the profit would be $216. If you decide to sell at $60, the profit will be $824, and if you decide to sell at $80, the profit would then be $1,432. As you would have managed to buy more shares steadily over time, your respective investment would, in all likelihood, continue to grow even faster.
In fact, even during situations where the big sum strategy may indeed result in a loss, the DCA would have managed to generate a profit for you.
DCA in a bull market
The abovementioned information pertains to dollar-cost averaging in a bear market. However, it is also important to understand how it would function in a bull market. Although this strategy is indeed effective during the bear market, it is perhaps not as potent as it would be in a bull market. You see, when a trader’s purchase prices would increase over time, the shares would then be accrued at a much lesser pace as compared to the number of shares that the trader would have purchased with a big sum.
For example, the trader may split $1,000 equally across four different purchases, and perhaps the prices per share could be $50, $65, $70, and $80, respectively. With such a purchase plan, the trader would then most likely end up with 15.5 shares. So, how would this affect the trader’s profit? Well, if the selling price was $40, then the profit would be negative $380 (thus going into a loss). If the selling price was $60, the profit would be negative $70 (still a loss), and if the selling price was $80 and the profit will be $240. As you can clearly see, the profitability pertaining to the trader’s investment would have diminished considerably.
DCA in a flat market
Apart from the bear and the bull market situations, there is also a third scenario that must be understood. This scenario concerns the involvement of a ‘flat market’ wherein the price of any given asset would be relatively stable over time. In such a market, you will most likely not feel the effect of dollar-cost averaging. It is for this reason that the strategy of dollar-cost averaging is perhaps most beneficial and effective when dealing with a bull or a bear market.
Link with cryptocurrency investing
Around this point, you would, in all likelihood, have noticed that the strategy of dollar-cost averaging is perhaps best suited for an investment class that tends to experience heightened volatility. As has been previously mentioned, cryptocurrencies tend to experience much more relative volatility as compared to other types of tradable asset classes such as stocks, for instance. As such, when dealing with cryptocurrencies, it might not be that simple to accurately predict the price movements.
In such a market, you would hence need to have the DCA strategy at your disposal so that you can even out your purchase prices as well as be able to effectively take advantage of the market dips. Nevertheless, it is extremely important to make sure that you do not end up suffering substantial losses during any given bull cycle. Moreover, as has already been mentioned, the dollar-cost averaging strategy is more potent during a bull market.
Advantages and disadvantages of DCA
This article will now talk about some of the main advantages and disadvantages associated with dollar-cost averaging. As far as the advantages are concerned, it is a safe assumption to make that DCA investing into cryptocurrency assets would amplify the potential profitability pertaining to investments as you will be able to effectively take advantage of different price dips.
Some of the other notable advantages may include the avoiding of risks that may come from the mistiming of markets, as well as the elimination of emotion-oriented investment decisions. Perhaps the biggest advantage by far is that dollar-cost averaging is more suitable for those traders who are primarily interested in long term investments.
As far as the disadvantages are concerned, the most obvious disadvantage would most likely be the increase in transaction fees. As this strategy would normally involve multiple purchases, it could, in all likelihood, result in the trading cost increased significantly, particularly when you may be utilising cryptocurrency broker services for the purposes of fiat to cryptocurrency exchanges.
Still, depending on your respective profitability as well as the investment duration, you might not feel the impact of the additional overhead cost which may arise from periodic purchases as compared to purchasing with a big sum. Furthermore, there may also be potential losses that may stem from the constant increase in the price of any given asset. This is because the higher the purchasing prices would be over time, the lesser the effect of DCA as a viable investment strategy would be.
Closing remarks
Dollar-cost averaging would hence be best suited for those traders and investors who want to act on a long term basis. It is a viable investment strategy, and it has been known to help numerous traders in the past. If you are hence interested in long term investments, then dollar-cost averaging is a strategy that you should definitely consider.
Tokenhell produces content exposure for over 5,000 crypto companies and you can be one of them too! Contact at info@tokenhell.com if you have any questions. Cryptocurrencies are highly volatile, conduct your own research before making any investment decisions. Some of the posts on this website are guest posts or paid posts that are not written by Tokenhell authors (namely Crypto Cable , Sponsored Articles and Press Release content) and the views expressed in these types of posts do not reflect the views of this website. Tokenhell is not responsible for the content, accuracy, quality, advertising, products or any other content or banners (ad space) posted on the site. Read full terms and conditions / disclaimer.
