Price volatility is common for cryptocurrencies such as Bitcoin, sometimes daily or even hourly. Often, volatility causes concern, uncertainty, fear, or even avoidance. However, volatility drives the cryptocurrency market and you are still able to make a profit when markets are fluctuating.
Buying low and selling high is not always as simple as it seems. In fact, it is not an easy task, even for professionals or institutional investors. Many investors instead of trying to “time” the market, use a strategy called “dollar-cost averaging” (DCA) to lessen the volatility of the market by investing less in an asset, such as crypto, stocks, and gold, on a regular basis.
DCA may be the best option if you believe your investments will appreciate or increase in value over the long-term and that there will be price volatility along the way.
What is DCA & How Does it Work?
DCA can be a great way to own crypto without having to time the market or take the risk of using all your funds at once.
It’s important to choose an affordable amount and invest regularly, regardless of the asset’s price. This can help to “average out” the cost of purchases over time, and decrease the impact of sudden drops in the price of any purchase. DCA investors can still buy as planned, even if prices fall. They will be able to earn potential returns when prices recover.
Main Benefits of DCA
Timing risk is less likely to affect you
Timing risk refers to the possibility of purchasing an asset at a given price and then seeing its value fall tomorrow. Dollar cost averaging reduces this risk by spreading investments and aiming to balance your average price per share among higher and lower share prices.
Protects you against making impulsive decisions
Dollar cost averaging has a psychological benefit. By spreading out investments over time, investors may feel less overwhelmed and like they are betting everything at once. Sometimes investors make impulsive investments in the heat of a market, which can lead to losses. You can avoid emotional turmoil by investing in a steady manner and avoid selling stocks when it is not convenient.
Exposure to Prices Across Time
DCA allows investors to see prices across time. This strategy helps investors to profit from any price movements, regardless of whether a market is experiencing price volatility.
Buy-in now Profit Later
An investor who believes that prices will fall but will recover over the long-term should opt for DCA. DCA allows them to invest cash for the time they believe a downturn will occur. They’ll be able to buy assets at a cheaper price if they are right. Even if they are wrong, they will still be able to invest in the market when the price rises.
Restricts Emotion-driven Trading
DCA is a method of investing that follows a set of rules. Many new traders fall for the trap of emotional trading, where buying and selling decisions are influenced by emotions like fear or excitement. These factors can cause investors to fail to manage their portfolios effectively (think panic selling in a downturn, or overbetting out of fear of missing exponential growth).
Who is DCA Ideal for?
DCA is a great strategy for those who don’t have much capital to start but want to get their money working as soon as possible. Although you may only contribute a few hundred dollars per month, the compounding power of returns will allow you to accumulate wealth over time.
This strategy is also great for investors who are cautious about the market’s ups and downs. Your emotions can be removed because you invest consistently, regardless of market conditions.
DCA can help you reduce risk if the market falls further since it does not require that all your money be invested. The fact is that the more the market falls, the better it will be for you because you can buy more shares with the same amount of money.
Investors who have already invested a large sum of money might not be able handle volatility, and may opt to sell at rock bottom. Panic selling can not only lock in losses, but also exposes you to the possibility of missing the best days of the market.
Do Cryptocurrency Investment Platforms Permit DCA?
Modern trading platforms and investment platforms, like Bitcoin Smarter allow dollar cost averaging. Users will connect their bank account to the investment account, deposit an initial amount, and then manually set up the scheduled contributors.
Investment platforms can automate investments. Investors don’t have to do much beyond initial setup.Automated investment systems such as dollar cost averaging can be used to alleviate stress and anxiety that comes with trading the market. This is something that often plagues new crypto traders. We can see how small amounts of bitcoin could have been invested over a 10-year period to demonstrate the effectiveness of a simple DCA strategy.
Review DCA as an Alternative Investment Strategy.