Dollar-Cost Averaging (DCA) is an investment tactic of using fixed amounts of money on the same asset over a long time, with different price points at different times. Therefore, it serves long-term holders better, mostly in highly volatile markets. Due to this nature, DCA can reduce the risks of investing in the highly volatile crypto markets. This method is also one of the best investment strategies for stocks and crypto newbies.
However, it is good to increase the investment amounts on dips and reduce them on bullish markets to maximize profits. This varying amount of money during bearish and bullish markets creates a more viable variant of the DCA strategy.
This Variant of DCA strategy compares investing large sums of money on dips and smaller amounts on bullish markets. This method of investing large sums in drops and selling off in ATHs and highs is defined as Lump Sum investing.
How does Dollar-Cost Averaging Work?
DCA is not for everyone, but it works better than other investment strategies. It involves looking for a viable investment asset and determining the amount of money to invest in it. Then, select a long time to buy stocks gradually and in small portions.
For example, if Bitcoin seems like a good asset to invest $10,000 in, it would serve better to invest $2000 for the next five months. This technique will help reduce trading risks and better exposure to more favourable prices than investing the whole sum at once. To calculate the average cost of purchasing tokens and shares, take the total sum of money and divide it by total shares bought.
A real-life application of the DCA investment strategy is the 401(k) plan. This plan allows for automatic purchases of shares with a pre-set portion of a worker’s salary.
When is it Best to go for DCA in Cryptos?
DCA has lesser risks than other investment strategies in the highly volatile crypto market. However, the major downward of this method is that it is unfavourable for short time holders. In situations like the ones below, it can offer more returns to an investor.
- When a particular asset is poised to increase in value over time, in the event of reliable predictions or positive trends of a specific investment, DCA will help in reducing its trading risks.
- Averaging high market fluctuations. Crypto markets are known to skyrocket and crash in a relatively short time. Therefore, continuous investment of pre-set amounts of cash over a long time reduces these variations.
- To do away with FOMO trades. The fear of missing out (FOMO) leads an investor to buy cryptos that end up dumping and making huge losses or little profits. Therefore, DCA is the best strategy to beat FOMO and emotional trading.
However, it is best to do your own research(DYOR) before investing in stocks and cryptos.