Dollar-Cost Averaging: What It Is and How to Use It

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If you’re looking for a way to reduce your risk when it comes to investing in crypto, you should consider using Dollar-Cost Averaging (DCA). This investment strategy can be a great way to minimise your losses and maximise your profits. In this article, we will discuss what Dollar-Cost Averaging is and how you can use it in your own crypto investments.

For cryptocurrency investors, volatility is a fact of life. Dollar-Cost Averaging is an investment strategy that involves buying a fixed dollar amount of a particular asset on a regular schedule, regardless of the price of the asset. By buying the asset at different intervals, you will be able to average out the price and reduce your overall risk. For example, let’s say you want to invest $100 in Bitcoin every week for a total of $500 over the course of five weeks. The price of Bitcoin could go up or down during those five weeks, but by investing the same amount each week, you will be averaging out the price and reducing your risk.

Dollar-costing averaging is a way of investing in cryptocurrencies that minimises the risk involved. Here’s all you need to know about dollar-costing averaging, and how to use it in your crypto strategy.

What Is Dollar-Cost Averaging?

When it comes to a long-term investor, a measured and deliberate approach is the best strategy. Dollar-costing averaging may help you concentrate on the gains over time rather than the ups and downs of a day or week when it comes to this.

The goal is to break down your entire investment into small parts and invest it in the market on a regular basis. For example, if your annual objective is to put $1,500 in Bitcoin each year, you would invest around $125 monthly throughout the year. Those donations might be divided down even further depending on how often you want to invest.

Dollar-cost averaging is a technique of buying an asset at regular intervals for a fixed dollar amount, with the intention of profiting from both highs and lows. If the price of your investment drops while you’re dollar-cost averaging, you’ll make money if the price rises back up.

Dollar-cost averaging is often the most realistic and accessible approach for many individuals to ensure that they enter the market with a lower degree of risk, especially if they have a longer-term time perspective.

How Dollar-Cost Averaging Works for Crypto Investing

Dollar-cost averaging is considered a safer approach to crypto investment than lump-sum purchases and sales, according to experts. It’s lower risk and almost always lower profit, but it does offer the opportunity to make money during market fluctuations.

“If you put a certain amount of money in Bitcoin every single week since 2010, you’d be one happy person right now. If you did it over the last year, today you may not be happy, but maybe in a few months you would be incredibly happy,” says Ron Levy, CEO of The Crypto Company, a firm that provides consulting services and education on blockchain technology.

Dollar-cost averaging, like any approach, is only effective if your investment increases in value over time. And because crypto is still new, yes – though it has been around for over a decade now, and a highly speculative asset, it’s hard to anticipate if it will be profitable in the future.

According to Levy though the past predicts the future, when we talk about crypt that may or may not be right because Bitcoin’s first decade is so new that it’s not a trend yet.

There are many crypto influencers that suggest sticking to Bitcoin — the most valuable and commonly held cryptocurrency — when dollar-cost averaging crypto unless you’re OK with more risk. The reason behind this is that Bitcoin is one of the more stable crypto investments, in time.

That means buying a little bit of Bitcoin at regular intervals over time, no matter the price at the time. Doing so helps avoid the psychological stress of buying at, say, $60,000 only to see your investment lose 10% of its value in a day. 

Benefits and Drawbacks of Dollar-Cost Averaging in Crypto

Generally speaking, dollar-cost averaging can be the go-to strategy for investors with lower risk tolerance. A dollar-cost averaging strategy might also assist crypto investors to deal with the extra risk and volatility that comes with the cryptocurrency market.

It’s also a strategy for avoiding the “time the market” approach, which research has shown is an ineffective strategy for investors. You balance out short-term market volatility in an emotional and financial sense by accumulating wealth over time.

But dollar-cost averaging crypto does have its downsides.

Dollar-cost averaging helps you protect against a market loss if one occurs, but less risk might imply lower returns. Dollar-cost averaging is not, in this case, a technique to maximise investment return, but rather a risk management approach. If you’re comparing dollar-cost averaging to lump-sum investing solely on the basis of profit, multiple studies have shown that lump-sum investing outperforms in the long run.

You may also have to pay more fees over the long term using this strategy. When you buy, sell, or trade cryptocurrencies on a crypto exchange, you will be responsible for any trading fees. Exchange costs are frequently a percentage of your trade and are charged per transaction. For example, Coinzix charges $0.99 for every transaction of $10 or less. But fees can differ whether you’re the seller or the buyer, and there may also be different charges depending on which currencies you trade.

Conclusion

Dollar-cost averaging is not a guaranteed path to riches, but it can be an effective way to mitigate some of the risks associated with investing in crypto. When done correctly, dollar-cost averaging allows you to take advantage of market fluctuations and potentially increase your returns over time.

Before adopting this strategy, make sure you understand the fees associated with buying and selling crypto on an exchange. Dollar-cost averaging may not be right for everyone, but it could be a good option if you’re looking to invest in crypto without putting all your eggs in one basket.

Name Price
Bitcoin (BTC)
$17,199.28
Ethereum (ETH)
$1,290.91
BNB (BNB)
$301.32
XRP (XRP)
$0.404707
Cardano (ADA)
$0.320311
Polkadot (DOT)
$5.42
Solana (SOL)
$13.91
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