Is Dollar Cost Averaging (DCA) the best crypto investment strategy?
One of the most popular cryptocurrency wealth-building strategies is hodling, but there is another aspect of hodling that most crypto newbies are unaware of. Hodl is a long-term strategy where an investor intends to hold a currency for a period of time.
The goal is for the coin or cryptocurrency to move from point A (low price) to point B (high price). However, there are ways for an investor to get more out of the hodl method, and the Dollar Cost Average (DCA) strategy is one of the best.
What is the Dollar Cost Averaging (DCA)?
In dollar-cost averaging, an investor invests in small instalments over time, rather than a fixed amount at a time.
The aim is to take advantage of downtrends in the market and thus generate profits. With DCA, a beginner can get the most out of the cryptocurrency market, taking advantage of cryptocurrency downtime and adding to their portfolio with every price drop.
Ultimately, the coins are sold for more significant profits. With this investment strategy, you get to minimise the impact of volatility when investing or purchasing a large chunk of a crypto asset.
Dollar Cost Averaging is a traditional investment tool used by stock markets and index funds that can be applied to cryptocurrencies. DCA helps you as an investor to protect your funds from loss and increased profit margins.
This investment method is excellent for beginners who want to invest for the long term and would easily panic if the price of crypto falls. Also, more experienced traders use this method instead of trying to time the market to get the best price.
How does Dollar-Cost Averaging work?
At an average dollar cost, an investor invests in bits over a period of time rather than investing a fixed amount at a time.
Here’s how dollar cost averaging works in typical crypto investment.
An investment of $200,000 in crypto coins using DCA can be made over eight weeks by investing $25,000 every week in subsequent orders. The table below illustrates the trades for lump-sum investment and DCA strategy:
The total amount spent is $200,000, and the total number of coins purchased with a lump-sum investment is 2,353. However, under the DCA approach, 2,437 coins are purchased, representing a difference of 84 coins worth $6,888 at the average coin price of $82.
Did you notice that in the dollar-cost averaging example above, DCA can increase the number of coins purchased when the market is declining and can lead to fewer coins purchased if the coin price is rising?
Now, let’s talk more about the benefits of the Dollar Cost Averaging strategy for your crypto investments.
6 Dollar Cost Averaging Benefits for Crypto Investors
1. Risk Reduction
DCA reduces investment risk and preserves your capital to avoid a crypto market crash. It holds cash and provides liquidity and flexibility in managing your investment portfolio.
Dollar Cost Averaging avoids the disadvantages of blanket investing by buying a crypto token when its price is artificially inflated by market sentiment, resulting in a lower-than-necessary purchase of a cryptocurrency. When the token’s price retraces its intrinsic price through a market correction or the bursting of a bubble, an investor’s portfolio shrinks.
Some recessions drag on and further reduce portfolio equity. Using DCA guarantees minimal losses and potentially high returns. DCA can reduce your feelings of regret by providing short-term protection against a rapid decline in a crypto price.
A declining market is often seen as a buying opportunity; Therefore, Dollar Cost Averaging can significantly increase your portfolio’s long-term return potential when the market starts to rise.
2. Cheaper for All
Buying crypto tokens when prices are falling guarantees the investor higher returns. Using the DCA strategy ensures that you buy more crypto than you would have done when prices were high.
3. Overcome Market Downturns
Using the Dollar Cost Averaging strategy, which involves regularly investing smaller amounts in falling markets, helps to overcome market declines. The portfolio using DCA can maintain a healthy balance and leave upside potential to increase the value of the portfolio over the long term.
4. Disciplined Economics
The strategy of regularly depositing money into an investment account allows for disciplined saving because the portfolio balance grows even as working capital decreases. However, a sustained market decline may adversely affect the portfolio.
5. Avoid Bad Timing
Market timing is not a pure science that many investors, even professionals, have mastered. Investing a lump sum at the wrong time can be risky, which can significantly hurt a portfolio’s value. Market fluctuations are difficult to predict; therefore, the dollar averaging cost strategy offers acquisition cost smoothing, which can benefit the investor.
6. Manage Emotional Investments
Emotional investment phenomena caused by various factors such as making a large global investment and loss aversion are not uncommon in behavioural theory. Using DCA eliminates or reduces emotional investments.
A disciplined buying strategy by DCA allows the investor to focus their energies on the task at hand and eliminates multimedia news and hype about stock market performance and near-term direction.
One of the benefits of Dollar Cost Averaging is that it removes the emotional aspect of trading, especially during bear markets. However, if you invest some of your money and the market decides to go up, you will lose a lot of profit. There is also the upside of the smaller transaction fees that can be incurred when buying bits instead of a lump sum at once. Ultimately, DCA is a great long-term strategy that helps crypto newbies and long-term investors by capitalizing on asset depreciation. Click here to earn all about Decentralized Finance for newbies.