The crypto market is marked by high volatility, which means any gains obtained from the markets could very quickly be negated into loss territory. This could be daunting for investors who wish to put their life savings into crypto, especially if they are new to the industry. However, by using the dollar-cost averaging, one can significantly reduce the risk of loss while compounding gains over time.
About the DCA strategy
DCA is a strategy in which you invest a fixed amount of money over regular intervals. This allows you to profit from any market upturns while reducing the amount of money you stand to lose to any sudden price drops. This strategy is not a new invention that’s exclusive to crypto. As a matter of fact, it has been in use in the stock market for years now, with quite a several testimonies of success. This is despite the fact that by utilizing this strategy, you are essentially buying at both market troughs and peaks.
The good news is that this strategy allows you to take up large positions on your crypto of choice over time without as much emotional involvement as if you’d invested a lump sum at a go. In the case of the latter, any subsequent dips may get you worried about losing a huge chunk of your investment, and you liquidate your positions at a loss.
How it works in the crypto
First off, you would need to set a target amount that you want to invest in crypto and choose a time period to do it over. Next, divide the chosen time period into equal intervals, which could be days, weeks, months, or even years. Once each interval lapses, you will invest the equivalent of your target amount divided by the number of intervals you chose.
For accountability, you should maintain a spreadsheet to help you track your purchases. Additionally, you have to stick to your plan no matter the condition of the market. This is where most traders go wrong, as they are afraid of buying at market peaks. Others get tempted to withdraw their funds once they start venturing into profit territory. However, the discipline of sticking to your plan will pay off in the end.
Is DCA worth the trouble?
By utilizing DCA, you get to invest large sums of money into crypto while significantly reducing the risk of losing all your money. Additionally, most traders will find it easier to commit to making small purchases even in unfavorable market conditions than one large one that could very easily be mistimed.
However, if correctly timed, a lumpsum purchase of crypto would yield the greatest returns. DCA, on the other hand, may yield lower returns, but the risk of severe losses is greatly reduced. It also reduces the chances of trading out of FOMO.
Moreover, by employing DCA, you won’t have to spend time scouring the markets looking for an opportune moment to enter your trades, which more often than not boils down to chance. This is time that could be used to pursue more profitable endeavors.
How often should you make purchases in DCA?
The determinants of your trading frequency will primarily be your budget and how soon you intend to reach your investment goals. If you intend to invest thousands of dollars into Bitcoin by year’s end, for example, but your budget only allows for small dollar purchases, you may need to buy the coin more often, say daily or weekly. However, each of these purchases will be charged a transaction cost, which varies depending on the exchange you utilize.
Therefore, a prudent move would be to reduce the frequency of your transactions so as to reduce the transaction fees in the long run. Since DCA is a long-term investment strategy, the returns obtained over the years will well surpass any transaction fees you incur.
Notably, some platforms such as Coinbase and Gemini have a DCA feature, where you link your bank account to your trading account, and the purchases are made automatically in the intervals you specify. This way, after the initial setup, all that’s left to do is wait for your yields.
To demonstrate the viability of this strategy, let’s consider an investor who buys $1 of BTC every week. In 10 years, they would have invested a total of $520, which would have cumulatively yielded $370,514 in profit. This is a 71,252% gain. If, instead, they invested the weekly $1 over a 5-year period, the total amount would have been $260. From this, they would have obtained a profit of $1,755, amounting to a 675% gain. Alternatively, if they only invested a dollar every week for one year, the $52 investment would have yielded $10 in profit, a 19.2% gain.
From the above figures, it is evident that even a small investment, if done regularly for a long enough period, can yield substantial profits.
Word to the wise
Though DCA promises high yields, in the long run, not all cryptos will gain value over time. Therefore, it is very important to do your research before committing to any cryptocurrency. The coin you choose must have solid fundamentals, utility, and a viable roadmap to achieving its project goals. Additionally, it is always a wise idea to diversify your investments, just in case the cryptocurrency you choose ends up crashing in the future.
The DCA strategy involves buying small amounts of crypto at fixed intervals so that, over time, you invest a large amount into the digital asset. The purchases should be made regardless of the market conditions, even when it seems like you are buying the peak. What’s more, you should always stick to your plan and avoid withdrawing any profits beforehand. Over time, this strategy yields significant profits while offsetting the risk of large losses.