Dollar-cost averaging is a popular investment strategy used in many financial markets as it has proven reliable in different market situations. Knowing how it works could help you manage your investments better, especially in the highly volatile crypto market. Let’s quickly look at how this popular strategy works and its benefits and drawbacks.
What Is Dollar-Cost Averaging?
Dollar-cost averaging (DCA) involves investing a certain amount of money in crypto (or other assets) at regular intervals to mitigate the negative effect of market volatility on investments.
The investment method prevents investors from risking all of their capital on any trading position. Therefore, they invest bit by bit with the hope that the market price will continue to become favorable. DCA is one of the best investment strategies for retail investors to build long-term profits.
How Dollar-Cost Averaging Works
To carry out dollar-cost averaging, you need to determine the amount of money you are willing to invest. Once that is defined, you can proceed to the asset or group of assets you want to invest in. The asset to buy should be the one you believe in its growth. That is, you think its price will rise, even though you don’t know when that will happen.
Suppose you want to invest $10,000 in Ethereum. Your dollar cost averaging strategy could be to invest in 50 different positions. You would have to invest $200 at different points until you exhaust the money. Depending on your strategy, you may buy Ether every day, every week, or at whatever predefined time or point you must have set.
So let’s say the price of 1 ETH is $1,200. You can buy $200 worth of it at different prices, say at $1,300, $1,350, $1,400, and $1,500. Of course, it is not always that straightforward anyway. The market won’t continue to rise in price forever; there will be a form of price retracement or even a long bear market that will push the price below the starting point.
Let’s assume the price falls to $900 for 1 ETH, meaning that your entire position is at a loss. Buying at that point can put you in a better position in the long run. It helps you buy at a very low price and benefits you early from bullish moves. Carrying out the practice continuously till you exhaust the money is simply what DCA is—you invest at different points to reduce losses that may come from buying at just one position.
Some investors prefer using DCA during bear markets since they cannot correctly predict the point of price reversal. As the price declines, they begin to buy at different points. They do this believing that the bulls will take over some points and their positions will yield profits.
Your dollar cost-averaging strategy does not have to be carried out on just one asset. It can also be done on various assets at a time. The idea might even be to invest a particular amount in any random asset within a chosen set.
You can also automate your DCA strategy through the auto-invest or DCA bots provided by crypto exchanges and platforms that create robots. These crypto trading bots do all the work for you based on predetermined conditions. All you have to do is to set your preferred parameters and let it run. Platforms that offer DCA trading bots include:
Crypto.com offers a DCA trading robot, which executes trades based on predetermined parameters on its exchange. The bot is freely available to all its users.
The Bybit DCA trading bot is also free for Bybit users, and you can fund it with USDT or USDC. The bot allows you to choose up to five cryptocurrencies for your DCA strategy. After determining the amount you want to invest, you can choose the frequency of trades, ranging from every ten minutes to once every four weeks. You can also modify or terminate the bot as you desire.
3commas’ trading bots can be used on up to 18 exchanges, including Binance and Bybit. It also supports TradingView integration. You have three-day access to the free plan, after which you can subscribe to the Light, Advanced, or Pro plan.
The Coinrule crypto trading bot allows you to set your DCA strategy based on time or price. The bot can also help you secure some profit from your trades. This way, it helps you sell part of your coin to your base currency to accumulate profits over time. Coinrule has a Starter plan that is free to access. It also has Hobbyist, Trader, and Pro plans, priced at $29.99, $59.99, and $449.99 monthly, respectively.
The BitsGap DCA trading bot allows you to have a seven-day free trial without inputting your credit card details. It has a Basic, Advanced, and Pro plan at $23, $55, and $199, respectively. You can pay via your bank card, PayPal, and more than 59 different cryptocurrencies.
3 Advantages of Dollar-Cost Average Investing
Below are three benefits of DCA investing.
1. Opportunity to Start With Little Capital
Using DCA allows you to invest a small amount per time. Thus, this method of investing is affordable for investors who do not have the whole capital to invest at once. In addition, when the prospect of a coin is uncertain, DCA allows you to invest in such coins bit by bit until you gain confidence in how the coin might perform in the future.
2. Easy to Use
Dollar-cost averaging is a simple and easy method of investing. It requires no technical knowledge, which makes it a good choice for beginners. With the availability of auto-invest and DCA calculators, it even becomes easier to carry out this method.
3. Emotional Stress Is Reduced
DCA protects investors from making emotion-driven decisions. Constant crypto volatility and regular price fluctuation have a way of getinvestors’investors’ emotions. However, this investment strategy reduces the stress of regularly observing market trends for trading opportunities. Therefore, you worry less about the price swing or short-term volatility.
3 Disadvantages of Dollar-Cost Average Investing
Dollar-cost averaging also has some drawbacks, as you might expect.
1. Tendency to Miss Larger Profits
A major drawback of using DCA is the tendency to miss out on larger gains. This could occur when DCA investors put in smaller sums rather than a lump sum when the market price is low. Hence, DCA investors could have lower gains compared to investors who put in a larger amount of capital at once.
2. Trading Cost
DCA can lead to higher trading costs because your orders are executed regularly. The trading costs are fees charged by trading platforms for every executed transaction. However, since the strategy is more of a long-term goal, the eventual gain might cover the trading cost.
3. Longer Investing Time
Lastly, DCA is more of a long-term investing process, which means you may not have instant profits. Depending on your strategy, it might take months or years to achieve a desirable profit.
Smart Choice for Conservative Investors
With the DCA strategy, you get to invest in cryptocurrencies more conservatively. However, risking less might also result in lower profits than you would get if you invested all your money in a single position, though investing all in one position also has its downsides. As a rule, goes, the higher the risk, the higher the potential profit or loss, and vice versa.
Dollar-cost averaging is a smart choice for new investors, expert traders, and conservative investors who are content with small, consistent increments in their holdings.
The information on this website does not constitute financial advice, investment advice, or trading advice, and should not be considered as such. MakeUseOf does not advise on any trading or investing matters and does not advise that any particular cryptocurrency should be bought or sold. Always conduct your own due diligence and consult a licensed financial adviser for investment advice.