June 24, 2021 |James Messi
Greater objectivity in investing is greatly aided by the Dollar-Cost Averaging (DCA) strategy by ridding the activity of any emotional factor. In general, when employing this investing technique, risks of varying degrees cannot be avoided, and Dollar-Cost Averaging is not any different.
What sets it apart from other techniques is that the need for timing markets is effectively eliminated through periodic buying of assets. And while that is yet to be expounded upon, the question that a number of crypto traders are asking is, can they apply the same strategy with Crypto trading–say buy Bitcoin and hold the investment for a long period of time?
To answer this question, we must first dive into what Dollar-Cost Averaging actually is and how it serves traders to make better investment plans.
Dollar-Cost Averaging: The Fundamentals
As already stated, the Dollar-Cost Averaging strategy is an investment technique that helps investors greatly through the elimination of emotions in making important trading and investing decisions. Investors are given the ability to lessen the possible negative effects of the volatility in prices through the spread of purchases across intervals that have already been defined. What happens is that the investor is encouraged to invest an amount that is already fixed every week, month, or at least twice a month, despite price changes. This is being done over having to invest in a lump sum for a certain asset.
Volatility is one of the primary things that the Dollar-Cost Averaging strategy is trying to keep at bay. The idea here is that the investor would be allowed to navigate through the market without meticulously looking into what the best entry point might be. The technique aims to render sounder prices for purchases within a specific investment timeframe. This is seen by analysts and long-time investors as preferable over making investing on a lump sum on the highest possible asset market price.
Novice traders would benefit greatly from this strategy as Dollar-Cost Averaging does not compel a trader to learn through complicated and highly technical concepts in Market Analysis. On top of this, those looking into long-term investments are at an advantage when they use this strategy given that they are given the opportunity to keep an investment with a fixed amount for an asset. As this is the case, they do not fall into the clutches of either fear or greed, something common to short-term techniques.
One thing that is also worthy of note is that Dollar-Cost Averaging is better when done within the context of a bear market. This is so as the DCA effectively provides investors with a framework that takes into account buying the dip.
Dollar-Cost Averaging: How It Works and Its Impact
In a bear market, DCA requires capital to be spread across a number of purchases. Given that it is a long term investment, say you are going to use a capital of 1,000USD for a buy that would stretch into a four month period, then you would eventually keep equal parts of your capital across the months. The price may dip during this timeframe, thus rendering different interval prices and accruing notable shares. This impacts your investment over time, allowing further growth of your investments. And while the investments built on lump sum buys, the DCA would still be able to earn and make profits.
However, there is a downside to the DCA. As already mentioned, it is a good strategy employed within a bear market. This is not the case with a bull market. This is the case as when purchase prices increase, the shares that investors would accrue would be lesser. With this, the potential of greater profit decreases.
DCA Crypto: What You Need to Know
DCA would not be felt with a flat market. When the asset goes sideways and posts within each interval, the shares would inch a little bit closer to the shares that had been brought for a lump sum.
All These are Good, But is DCA Good for Cryptocurrency Investments? DCA Crypto
Volatility is in fact catered to by DCA effectively. What this strongly suggests is that the investment strategy could work well for cryptocurrencies, given that the digital assets’ price movement in the market is completely unpredictable.
One thing to note when endeavoring in crypto investments within a bull market upon the employ of the DCA, is that it is preferable and wholly recommendable for one not to experience any losses. DCA holds potential when there is a decline in the prices of digital assets.
When using the DCA strategy in cryptocurrency investments, it is possible for you to opt to have the assistance of brokerages that provide periodic options for buying. Through these providers, you could
also come up with an investment and purchase plan through a choice of fixed prices to invest within the predefined intervals.
What this all simply means is that you can buy Bitcoin or any cryptocurrency and hold it for a time and not worry about market timing.
Apparent Advantages of Using DCA
With everything that had been discussed, it is already obvious that the DCA strategy is a completely advantageous technique that cryptocurrency traders could use. Here’s a recapitulation of what had been discussed so far:
- DCA is Meant for long-term investments
- The strategy rids the investors of emotions when lodging investments
- It does away with the risks that naturally come with badly-timed investments
But What are the Cons?
With the usage of the DCA, it is inevitable for the fees for transactions to climb. Trading costs of course will also be at a high given that this will allow multiple buys. This is especially true for crypto services for fiat-to-crypto exchanges. But of course, everything depends on the profitability, timing, and timeframe of the investments that you had made. You will not, however, be able to feel the rising costs of overheads in light of the purchases that had been made within certain periods.
As it is natural with any investment activities, it is also highly possible that the investor using the DCA would experience losses. This is because of the continuous surge in the price of the asset. With the purchase prices rising over a given period of time, the impact of the DCA.
As already made apparent with the discussion, employing the DCA strategy opens up investors in cryptocurrencies to greater chances of profit. This is especially true when the investor is investing in the digital asset for the long term, specifically in a highly volatile asset market.
The DCA is entirely appealing with its promise of ridding investment activities of anything that resembles emotions, with mistiming of the market kept at a low.
But as also discussed, using the DCA isn’t a one-size-fits-all strategy (as individual strategies usually are) as it is not recommendable to be used within the bullish phase.