What Is Dollar-Cost Averaging and How Can It Help You Profit From a Bear Market?
July 5, 2022
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With global economic turmoil impacting the crypto markets, gauging the “ideal” time to invest can be tricky. Instead of finding the perfect time to invest, dollar-cost averaging can help novice crypto investors and old hands alike to reduce their risk in a volatile market.
Dollar-cost averaging (DCA) is a strategy that involves investors periodically investing into an asset class.
To dollar-cost average, you simply divide the total amount that you’d like to invest into a particular cryptocurrency, for instance, and then use those funds to purchase the currency at regular intervals.
Investments are made at the same amounts irrespective of fluctuations in the asset price, the investment is executed at the same fixed interval indefinitely, or until the predetermined amount is used up.
The effect of this strategy is to reduce the overall impact of price fluctuations and to stop investors from having to wait for the “ideal” entry point and potentially missing out on low prices when the market picks up. Additionally, investors are saved from the effort of attempting to closely scrutinize the market as they invest on a regular basis regardless of the ups and downs of the market.
Dollar-cost averaging 101
Hypothetically, let’s say that one Bitcoin is worth $10 and that you decide to invest $1000. If you instead invest $100 per month over the course of 10 months and the price of one coin happens to drop to $7 for two months, you end up with more bang for your buck than had you spent the $1000 all at once.
Naturally, there is a risk that this could go the other way in the event of a price surge – the price of one token could rise in a bull market. But the benefit of this strategy is that you will have still invested a certain amount into the asset prior to the surge, but your risk is reduced if the price slides in value.
Who benefits most from dollar-cost averaging?
Rookie investors and those less interested in the technical details can opt for DCA as a safe initial strategy and an easy way to gain market experience. DCA is also an appealing option for those looking to invest long-term because it forces investors to adhere to a consistent investment schedule.
Does dollar-cost averaging benefit crypto investors?
Given the volatility of cryptocurrencies, DCA can help investors to take advantage of decreases in crypto prices. A safe starting strategy could involve selecting a particular token and investing small amounts over a set timeframe. However, a key factor to take into account is transaction fees, which could add up with DCA.
Another risk to bear in mind is losing out on the large gains that can be made from “buying the dip” at the opportune moment – but the key thing about the DCA strategy is that it’s a safer investment route. With DCA rookie investors can still benefit from large gains but they are better protected if the price falls.
As always, this article does not constitute financial advice and you should be sure to do your own research and consult a professional financial advisor before making any investment decision.
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