Many crypto investors start investing without a plan. It is essential to have an investment strategy when you invest in crypto. You are less susceptible to the volatility of the market when you stick to your investment plan.
Investment strategies can be different for each investor. Each of us has a different financial goal that we want to achieve. But no matter what the financial goal is, every investor wants to make good margins on their investments. Dollar cost averaging is one such method which will help investors achieve their financial goals with ease.
What Is Dollar Cost Averaging?
Dca meaning : Dollar-cost averaging divides the amount of money you would like to invest and lets you buy small units over a regular period. Instead of investing all the lump-sum investment money at once, DCA reduces the risk of you paying more before the market prices drop.
Market prices do not move only in one direction. In the dollar cost average method, you can maximize your chances of paying a lower average price over time if you divide your investment and make multiple buys. A key component of long-term investment is consistency, and dollar cost averaging helps you invest your money consistently.
Dollar-cost averaging is used across several markets. The nature of the investment strategy is independent of the asset class. This makes it a formidable strategy that is time tested.
How Does Dollar Cost Averaging Work for Crypto?
Dollar-cost averaging will help an investor accrue welath if the asset prices rise over time, but asset prices do not rise consistently over the short term. Prices may not follow any predictable pattern and can run into short-term lows and highs. DCA can help you avoid these short term price movements.
Dollar-cost averaging is a popular strategy for crypto assets. Investors who have consistently purchased Bitcoin (BTC) or any coin for that matter in recent months have a low average buy price.
There is a possibility that your crypto assets can be worth a lot if you invest in crypto using the DCA strategy. Cryptos and blockchain technology are still considered new innovations and are full of potential. Given that the industry is new, it is normal for the markets to be volatile. Dollar cost averaging is one of the best solutions to mitigate risks and avoid volatility.
Dollar-Cost Averaging Example
Let’s look at a simple example to understand how to dollar cost average. Assume your total investment money is USD 25,000. You want to invest in a crypto token priced at USD 100. You will have 250 tokens if you invest all the lump-sum amount at once. Now, you decide to apply the DCA method and spread USD 25,000 over five months. You invest USD 5,000 every month. The per share price starts falling in the following months. The price goes from USD 100 to USD 75, USD 80, USD 85, USD 105, and USD 95. This way you end up gaining more value for money as you have more tokens compared to the lump-sum investment strategy.
Dollar-Cost Averaging VS Lump Sum Investing
- In dollar-cost averaging, regardless of the market situation, you invest equal amounts on a regular period. Whereas, in lump-sum investing, you invest all your money at once.
- You minimize market risks by spreading out your investments over a period in DCA investing. You expose all your money to market risk instantly in lump-sum investing.
- It is possible to get a low average purchase price per share over time in dollar-cost averaging. Price per share depends on market conditions at the time of entry in lump-sum investing.
Dollar Cost Averaging Benefits
- It strengthens the practice of regular investing to build wealth over a period of time.
- DCA can lower the average purchase amount you spend on crypto assets.
- When certain events send prices high, you are already in the market using the DCA method. Hence you buy less when the market is high.
- Dollar-cost averaging can take the stress away from investing your wealth as it is automatic.
- Dollar-cost averaging is also resistant to market timing errors
DCA is a popular investment strategy to get a lower average purchase price per share, limit market risks, and remove emotions while investing. Lump-sum investment is for those who want to buy crypto at an optimal price and exit the market at the right time. Lump-sum investments also come with risks but cannot promise higher returns.
The ultimate goal of an investor is to buy low and sell high. It is a difficult task to decide the best time to buy cryptos. Choosing the best investment strategy depends on your objective for investing, investment experience, and risk tolerance. Dollar cost averaging fits well into your investment practices if your goal is long term wealth creation.