Dollar Cost Averaging (DCA): How to Invest With It — DailyCoin
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The crypto market is a volatile and often unpredictable place. Identifying the perfect moment to buy digital assets is a challenge, even for trading professionals.
If you are looking for less stressful ways to invest in the cryptocurrency market, dollar cost averaging could be the solution you need.
It is one of the most popular ways of investing, that disciplines traders, eliminates emotional purchasing, and increases your chances of maximize your long term returns.
What Is Dollar Cost Averaging?
Dollar cost averaging is a simple investment strategy in which you invest a consistent amount of funds into the same asset at regular time intervals.
The key belief behind the DCA strategy is the idea that all assets tend to increase in price over time, however, across shorter time frames, they experience a range of ups and downs. Therefore, finding the perfect moment to enter the market is not an easy task, even for professionals, let alone inexperienced investors.
Dollar cost averaging focuses on long-term holdings and eliminates the need to seek the perfect window in which to buy the dip.
Accordingly, it lowers the impact of price fluctuations and helps traders to avoid painful mistakes such as buying too many assets at an overstimulated price or, on the contrary, too little when they are notably cheap.
The DCA method allows investors to lower the average cost of their investments over time, meaning that they lose less in the event that the asset’s price drops, but will generate higher returns when the assets’ price grows. Historically, regularly-made investments have typically led to higher returns in long run.
How Dollar Cost Averaging Works
When dollar cost averaging, you enter the market at regular time intervals to perform the same action; spend the same amount of money on buying the same asset.
What differs whenever you make the purchase throughout this method, is the price of the asset itself.
Let’s say you have $500 and wish to spend it in equal installments across 5 different months. By using the DCA method, this means you’ll be making five separate $100 purchases on the same day, each month.
As you know, price charts do not sit still and asset prices are in constant flux, so each time you buy, you do so at a different level. This means that the amount of a given asset that you’ve acquired varies accordingly.
When the price is higher, you obtain fewer units of the asset for your $100, but on the other hand, when its price drops, $100 nets a larger portion of assets.
Simply put, this means you get more assets when the market is at a low, and fewer assets when the market is experiencing a high.
What Are the Benefits of the DCA Strategy
What Are the Risks of Dollar Cost Averaging?
How to Start Dollar Cost Averaging
If you are new to crypto, your first priority should be to find an asset you would like to invest in. There are thousands of cryptocurrencies on the market to choose from, but always perform due diligence, some of these will simply be scams.
It is necessary to do your own research before investing. Study the coin, its whitepaper , use cases, tokenomics, team, and its community to understand the bigger picture and the coin’s potential.
The second task to undertake is to sign up and open an account on a cryptocurrency exchange. Registering on crypto exchange is completely free-of-charge that won’t take much time, and will provide you with a gateway to buying digital assets.
Once you’ve created an account, you’ll need to deposit funds. Most of the top crypto exchanges accept bank transfers and direct top-ups via credit cards.
Once your crypto account has the necessary funds, check if there is a trading pair of your chosen crypto and fiat. If not, you can exchange your fiat deposit into a stablecoin such as USDT, or USDC, and then use this to place a buy order for the crypto of your choice.
Last but not least, set up a cryptocurrency wallet to store your digital investments. Of course, you could keep your holdings in the custodial wallet of the crypto exchange, however in this instance you would not be the sole owner of your private keys, and in the event that the exchange suffers a hack, you would be at risk of losing your assets.
Related: How to Buy Crypto Properly Related: Simple Risk Management Rules for Crypto Traders
It is impossible to know where the market will go next, especially in such highly volatile markets as crypto. With dollar cost averaging you purchase assets in smaller amounts, regardless of their price levels. This makes investing a simpler process, and helps to maximize the chances of lower long term average investment prices.
