What is dollar-cost averaging (DCA) and how does it work?
Many crypto enthusiasts just start investing in cryptocurrencies without a strategy behind it. However, they should be aware that an investment plan is essential when you begin investing in crypto. By sticking to a strategy, you will have a clear overview and become less susceptible to the substantial price fluctuations in the crypto market.
Related: A beginner’s guide to cryptocurrency trading strategies
For each investor, this investment strategy can be different. After all, you invest in a way that suits your financial goals and that you feel comfortable with. For many people, the dollar cost average method (DCA) is the way to invest their wealth. This is because through this investment method, you make clear agreements that feel manageable for many people.
In addition, you can adapt the DCA method to your needs. DCA has some main features but also has room for your own interpretation. So in this article, we’ll cover the different ways DCA can work for you, what the benefits of this investment strategy are, and you can find out how to get started investing with the DCA strategy.
What is dollar-cost averaging (DCA)?
Dollar-cost averaging is a strategy used for investing in assets. You can use this strategy as a cryptocurrency investment strategy, but also with stocks, commodities or bonds. The investment product doesn’t matter, the strategy is so simple that you can apply it to any market.
Related: Cryptocurrency vs. Stocks: Key differences explained
In the case of DCA, it’s initially about investing a certain amount of money in a predefined asset and at a fixed time. This immediately gives you more oversight in investing and you know where you stand. This ensures that your emotions will be less influenced, something that can be difficult in the financial markets.
The expectation with the DCA strategy is that the price of an underlying asset will increase over time. By buying periodically, you invest when the price is high or low. All these purchases result in one average purchase price, which should be lower than the value of an asset.
How does dollar-cost average (DCA) work in crypto?
DCA is a very popular strategy for cryptocurrencies. People who have periodically purchased Bitcoin (BTC) in recent years have a very low average purchase price. The crypto market has only been around for a few years, and many people expect a lot from this market in the future. Nevertheless, it is not guaranteed that DCA in Bitcoin will now provide the same return. Therefore, do your own research well before you start investing.
Because blockchain technology and cryptocurrencies are still relatively new innovations, these developments could eventually become worth a lot of money. Here, it is important that the market continues to develop and adoption increases more and more. As an investor, you should therefore have confidence in the investment product you are going to invest in via the DCA method.
How to start with dollar-cost averaging?
Of course, it is really nice to understand how DCA works, but the most important thing is to apply the method. The most common way to apply DCA is to invest a certain amount of money in assets each month. This is because most people invest part of their salary and the salary is deposited on a fixed day.
To make the DCA method a personal plan, you need to determine a few things for yourself, namely:
For the DCA method, it is useful to choose a cryptocurrency that you expect to exist and increase in value in the future. This is why Bitcoin or Ethererum (ETH) are often chosen, as these cryptocurrencies are considered the most stable crypto projects.
Besides how much and how often you are going to invest, it’s also important to decide how you want to do this. You can invest manually or automatically. By choosing a platform where you can invest automatically, you can effortlessly use the DCA method. This way, you can build up your crypto portfolio without looking back. Just realize that earning more crypto does not automatically mean more profit. When prices drop, your cryptocurrencies are worth less.
Can you build crypto wealth using dollar-cost averaging?
Many people think that dollar-cost averaging is not suitable for making large profits, but nothing could be further from the truth. When people think of an average purchase price, they often think of an average exchange rate price, but this doesn’t have to be the case. If you invest at a fixed time and the price corrects around that time, the average purchase price could be very low.
Even experienced investors use the DCA method to get a good entry to the crypto market. This is because they know that it is very difficult to estimate the top or the bottom of the price. Only afterward can you state what the top or the bottom has been. This is precisely why experienced traders use the DCA method.
However, experienced crypto traders do not invest a fixed amount on certain days of the month but use the corrections as a buying signal. This way of dollar-cost averaging is a lot more flexible but also involves more emotions. If you want to use this strategy, for example, it is important that you do not suffer from FOMO, or fear of missing out.
The DCA method gives beginning investors the opportunity to invest in a similar way as experienced investors, as long as the method is executed well. Even for investors who have little knowledge or no time, this method can be very useful. As long as you make a plan in advance and stick to it, you can meet your financial goals.
What are the benefits of dollar-cost averaging for crypto investors?
Using the DCA method has several advantages for crypto investors. For example, you are much less affected by your emotions. Because the crypto market is enormously volatile, euphoric and sad feelings alternate at lightning speed. By not looking at the price and having your eyes on the long term, you put these feelings to rest.
Besides that, it is a very simple method, which can be used by both beginners and advanced investors. You don’t need a lot of knowledge or time to apply DCA. The fact that it is possible to automatically execute the DCA through various exchanges makes this method both technically and mentally easy.
When should you stop dollar-cost averaging?
It may sound strange, but actually, you should never stop dollar-cost averaging. This method is often used when investing in crypto, but you can also use DCA when selling your assets. The strategy remains largely the same only the difference is that you press the sell button instead of the buy button.
If you want to use the DCA method to build up a pension, for example, then you can actually continue using this method until you retire. Whether you’re doing dollar-cost averaging for retirement or for a shorter term, always make sure you have your plan well worked out in advance before you start investing.
Is dollar-cost averaging safe?
Dollar-cost averaging is a relatively safe way to invest, but there are always aspects to watch out for. In any case, this way of investing suits long-term investors. As the market evolves from time to time, however, this strategy may not prove productive in the long run.
Despite the fact that you invest in a relatively safe way with dollar-cost averaging, you still have no guarantee of a positive return. That’s why you should always keep in mind that you can also lose your investment and never invest with money you can’t afford to lose.
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