TL;DR - Dollar Cost Averaging (DCA) is an investing strategy where investors buy into an asset (e.g. stocks or crypto) in equal amounts at predetermined intervals. For example, instead of investing $12,000 once a year into Bitcoin (potentially at the highest or lowest market price that year), you can instead invest $1,000 every month therefore averaging out your purchase price (buying both the highest or lowest market prices that year).
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Dollar-Cost Averaging - The Perfect Investment Strategy
Dealing with the volatility of markets is the greatest fear of new crypto investors. The ups and downs on the graphs of cryptocurrency are the fate of crypto investors, but if this is what's stopping you from investing in crypto, you might be missing out on a popular term - Dollar Cost Averaging.
The strategy is not just restricted to crypto but also if you invest in stocks, ETFs, or Mutual Funds.
If you want to buy Bitcoin or Ethereum etc. but don't know when to buy, Dollar Cost Averaging is the technique you should be using.
What Is Dollar-Cost Averaging?
It might not be that hard to get that Dollar Cost Averaging is an investment strategy following which you invest an equal portion of an amount over regular intervals irrespective of the ups and downs of the market.
Definition: Dollar-Cost Averaging is a long-term investment strategy where you invest the same amount in a particular stock, ETF, mutual fund, crypto, etc., over regular intervals without keeping the trade price in focus.
Or in other words, it is a great way to cut short the calculations of finding the right time to buy. The investor buys at both highs and lows and ultimately ends up making profits by averaging the buying price.
Dollar-Cost Averaging is a great strategy for reducing price risk when investing in cryptos or stocks. Dividing up the investment and making multiple buys maximizes the chances of paying a lower average price over time.
Investors term the strategy as a key to successful long-term investing as it keeps your money consistently working, leading to better investment growth.
How to Dollar-Cost Average?
No matter how easy the strategy appears, it involves money and thus requires the investor to know how to Dollar Cost Average.
To begin using the strategy, choose a set amount that you are willing to invest in your choice of crypto or stock over a defined period. Once you decide on these two things - Amount and time- start investing without considering the market price and keep following the cycle until you reach the defined time limit.
How to Get Better Results from Dollar Cost Averaging
Create a spreadsheet to keep track of your investments.
Stay committed to your goal for better outcomes.
Don't get tempted with short-term profits and keep investing till the set time.
The market never goes one way, and DCA saves you from losing a huge chunk of money by averaging your investments.
There's no doubt that Investing a big amount all at once at the right time leads to huge profits. But it also carries a very high risk of loss. On the other hand, Dollar-Cost Averaging offers a safer passage for investors who have limited resources. It comes with a low risk of losing money and has a good reputation for making good profits for the investors.
Let's understand DCA with a Dollar-Cost Averaging Example
The below-mentioned table shows the DCA strategy being followed to buy Bitcoin in a couple of years.
If you invested $100 weekly starting from December 2017, you would have invested $16,300 in total. And in January 2021, you would have been having a portfolio worth $65,500(approx).
A bit of calculation is enough to find out that the total return over time is more than 299%.
While if you had made a lump sum investment every year, the total returns would have been only 113%.
It shows the profitability of the Dollar Cost Averaging and proves its potential in delivering high figure returns in the long run.
Is Dollar-Cost Averaging Worth It?
Buying low and selling high is what every investor wishes to do. But no one can precisely time the market. DCA lets the investors accumulate a good amount of crypto or stocks over time and slowly build a good portfolio.
It is a proven technique to avoid major losses and helps many small investors break the physiological barrier to investing.
Rather than defining DCA as good or bad, it is easy to interpret from the possible benefits that it is much better than watching the markets for dips and waiting for the time to buy.
How Often Should You Do Dollar-Cost Averaging?
There is no fixed frequency to using Dollar-Cost Averaging. It depends on the amount you want to invest and how much time.
One thing to remember about DCA is, in any case, you must follow the schedule and make regular investments for the duration you would decide in the beginning.
Dollar-Cost Averaging For Crypto
Investing in crypto is not everyone's cup of tea. The volatile crypto graph is pretty scary for new investors that drags them back from putting money into the market.
Dollar-Cost Averaging is the safest way to invest in crypto, and losing all of the capital in the volatile crypto market is not what anybody would ever want.
Although DCA might not bring huge profits in a short time, it is still a better way to make good profits with a lower risk.
You might be thinking, "Is DCA a good choice to make?"
For all the investors, old or new, it is required to do your research before investing in any crypto. In the context of investment strategy, DCA is a great way for inverters with low-risk tolerance.
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Who Should Use Dollar-Cost Averaging?
If you belong to the below-mentioned list of people, you can consider using Dollar Cost Averaging:
Beginner Investor with limited funds to buy crypto or stocks etc.
Don't want to put hours into researching to find the perfect market timing.
Making retirement investments every month.
Not interested in investing in down markets.
Benefits of Dollar-Cost Averaging
Dollar-Cost Averaging is not a new term in the market and has been a top strategy for investors to minimize the risk of loss that comes with volatility in the crypt market.
It is a well-tested strategy that eliminates the calculations of timing the investment. You can invest a portion of the amount frequently, which ends up lowering your Buying Price by averaging the price every time you invest during a defined period.
DCA is a great practice to neutralize the volatility of the market and bring better returns in the long term. It enables a steady growth of your profits over time, and you avoid the risk of lump-sum investing too.
When to Use Dollar-Cost Averaging?
DCA offers a great passage to the investors to safely enter the market and start adding benefits from the long-term upward movement of a particular cryptocurrency, stock, ETF, etc.
Also, it protects the investors from the risk of downward price movement in the short term.
If you are wondering when to use DCA, the following mentioned situations have the answer for your curiosity.
Buying an Asset that may touch new highs in the near future
If the price of a cryptocurrency or any stock is falling, but you think the market will show an upward movement in the future, you can use Dollar Cost Averaging to invest more cash during the downward movement.
When the market rises, you would be at an advantage for buying the asset at lower prices. Even if it doesn't happen, you'll be having a good investment at lower prices and would score profits once the market sees the upward trend.
Investing in Volatile Markets
When investing in a volatile market, the ultimate aim should be to average out any sudden increase or decrease in the portfolio. DCA is a great strategy to make profits irrespective of where the market goes, upwards or downwards.
New investors usually make decisions in excitement or fear and get stuck in the web of Emotional Trading.
It can lead to overbetting or panic selling, and the investors end up managing their portfolios in an ineffective manner.
Dollar-Cost Averaging is a rule-based investment approach and saves you from making decisions based on psychological factors, thereby allowing better portfolio management.
But just like any investment strategy, not everything is good about DCA.
Disadvantages of Dollar-Cost Averaging
Investment Risk and Profit are directly proportional to each other. You can not expect to make huge profits on low-risk investments. If we compare Dollar Cost Averaging and Lump Sum investment, the latter outperforms DCA in terms of profits.
Also, different exchanges charge the investors a particular fee for every trade that varies depending on your role, whether you are a buyer or a seller. E.g., the Crypto exchange Coinbase charges the traders $0.99 for every trade of $10 or less. The fees of trading on Coinbase also differ from what cryptocurrency you are trading in.
Thus, before planning to go with Dollar Cost Averaging, you must look into the column of fees you'd be paying overtime.
How to Dollar-Cost Average on Coinbase?
Coinbase is a crypto exchange, the largest in the US by trade volume, and allows the investors to exercise the practice of Dollar-Cost Averaging with a direct feature.
First, create a Coinbase account. Claim a FREE $10 with our link: www.Coursenvy.com/Coinbase
On Coinbase, you can activate the option of recurring purchase, and it'll execute the command at the set time for the fixed amount.
Follow these steps to Dollar-Cost Average on the Coinbase mobile app:
Tap the plus sign on the Home Tab.
Select the crypto you want to buy.
Enter the amount of crypto you want to buy, set the frequency of purchase of how often you want to make the purchase, and choose your payment method.
Tap on Preview Buy and then on Buy Now
To know how to Dollar-Cost Average on Coinbase through a web browser and how to cancel recurring purchases on the platform, click here.
Important Note - when you set up a recurring purchase on Coinbase, the command is executed immediately for a one-time purchase.
When Not to Use Dollar-Cost Averaging?
DCA is a great strategy for new investors, and the reasons are quite obvious from the information mentioned in the blog.
Use other investing strategies if:
You are ready to invest a large amount
You are investing in Mutual Funds that have relatively high investment minimums.
You love timing the market and are ready to invest extra time and research into it.
You want to invest for the short term.
A long-term investment strategy, Dollar Cost Averaging is a great way to sideline the risks that come up with lump-sum investing.
It is a safer choice for new investors as it prevents them from being affected by short-term volatility. But in exchange for the low risk on investments that it offers, the strategy restricts your profits.
A smarter way to look at Dollar Cost Averaging is by considering it as a strategy to reduce investment risks instead of the one to make huge profits.
Overall, we can say that Dollar Cost Averaging is a good investing habit for those who wish to put their money to work consistently, but it definitely requires some precautionary measures.
Start Dollar Cost Averaging into Bitcoin today! Navigate to www.Coursenvy.com/Strike on your mobile phone. Claim our FREE $10 in your Strike app with referral code "9oztfr".
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