What is Dollar Cost Averaging?
Most new crypto investors start investing without a strategy. It is important to have a plan for investors looking into the crypto space. By sticking to a strategy, investors are less susceptible to the volatility of the crypto market.
Each investor can have a different investment strategy. Each investor will have a contrasting financial goal that they want to achieve. Nevertheless, all investors want to earn good returns on their investments. Dollar-cost averaging is an investment strategy that helps investors achieve their goals without hassle.
What is dollar cost averaging?
Dollar-cost averaging is a process that involves dividing the total investment money to buy small units over a regular period. Dollar-cost averaging reduces the risk of investors paying more before the prices drop in the market. This strategy is less risky compared to investing all the lump-sum money at once.
Prices of crypto assets do not move in just one direction, especially in the volatile crypto market.
Investors adopting the dollar cost averaging strategy can maximize their chances of paying a lower average price over a long period. Making multiple buys by dividing the total investment money can help to bring down the average cost of buying crypto assets. Consistency is a crucial component of long-term investment, and using the dollar cost-averaging strategy can help investors invest in assets consistently.
The nature of the dollar cost averaging strategy is independent of the asset class across various markets. Being time-tested, dollar-cost averaging is a formidable strategy.
How to apply dollar cost averaging in crypto?
Dollar-cost averaging helps investors avoid short-term price movements. The DCA strategy can acquire wealth for investors if the asset prices rise over time, but these prices do not rise consistently over a short period. Market prices do not follow any pattern and can run into short-term highs and lows.
For example: In recent months, investors have had a low average buy price when buying Bitcoin or any other coin.
Investors using the DCA plan to invest in crypto assets have a possibility of their assets being worth much more than their buy price. It is typical for the crypto market to be volatile as the industry is new. The dollar-cost averaging strategy can help investors avoid crypto market volatility and mitigate risks.
An example of dollar-cost averaging
Let us look at an example to understand the principles of dollar cost averaging. Let us assume an investor’s total investment is INR 30,000. The investors want to invest in a crypto asset worth INR 100. The investor will have 300 crypto tokens if they put all the investment amount at once. Now, the investor uses the dollar-cost averaging strategy and decides to spread INR 30,000 over five months. Using the DCA strategy, the investor puts in INR 6,000 every month. In the following months, the cost of buying crypto assets starts falling. The crypto price goes from INR 100 to INR 80, INR 85, INR 102, INR 95, and INR 90. So, using the DCA strategy, the investor gained more crypto assets compared to investing all the lump-sum investment money at once.
Dollar-cost averaging strategy vs Lump sum investing
- Investors put all their investment money on an asset all at once in lump-sum investing. Unlike in a dollar-cost averaging strategy, investors put equal amounts of money over a regular period regardless of the market conditions.
- In dollar-cost averaging, investors minimize the risks of the market by spreading out their investments over a period. Investors who put all their money in the market at once and have exposed all their money to market risks instantly.
- The price per crypto asset depends on the market situation at the time of entry into lump sum investing. It is possible to get a low purchase price per asset over time using the DCA strategy.
Benefits of DCA strategy
- Dollar-cost averaging helps to maintain the practice of investing regularly to accrue wealth over a period.
- The average price paid to purchase a crypto asset can be lower using the DCA strategy.
- For Investors who were already in the crypto market when certain events sent crypto prices soaring. The DCA strategy can help investors not give into FOMO.
- As the DCA strategy is automatic, it can take the stress away from investors to invest regularly.
- Investors are resistant to market timing errors when using the DCA strategy.
The dollar cost averaging strategy is popular amongst crypto investors as it helps to limit crypto market risks, has a low average purchase price per crypto asset, and reduces stress while investing.
For any investor, the aim is to buy low and sell high. It can be hard to determine the best time to invest in cryptos. Choosing the best investment strategy depends on factors such as risk tolerance, investment objectives, and experience. Dollar-cost averaging is best for those investors whose goal is to accrue wealth over a long period.