What Is Dollar-Cost Averaging?
Dollar-Cost Averaging or DCA is a Wall Street concept that has been imported into the world of cryptocurrency trading and investments. It simply refers to a strategic move to buy the same dollar amount of a cryptocurrency at regular intervals irrespective of the prevailing market price of that cryptocurrency on such intervals. And this is applicable to all the other currencies not only dollars.
How Does DCA Work in Crypto?
In dollar-cost averaging, we will first start by setting aside the amount of money that we want to invest in a cryptocurrency. We can also place a standing order on our bank account to transfer the daily, weekly, monthly, or quarterly portion into the account that funds our crypto trade.
For instance, let’s assume we have $1,000 to invest in Bitcoin (or any other cryptocurrency). Now let’s say we will be able to buy 0.084745 BTC at the current $11,800 trading price. However, suppose if the trading statistics show that Bitcoin has traded significantly under $11,800 for much of the last year. Now, it’s difficult to know if we are buying low or buying high at current prices.
However, instead of buying $1000-dollar worth of Bitcoin once, we can split the money into 10 equal portions of $100 each and we’ll purchase $100 worth of Bitcoin on the 6th day of every month for the next 10 months.
At the end of the 10 months, we would have bought a slightly higher or lower amount of Bitcoin than the 0.084745 BTC that your $1000 would have bought originally.
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If the price of Bitcoin falls lower over the next 10 months, we might have a slightly higher amount of BTC. If the price of Bitcoin rises higher, we may have a slightly lower amount; but ultimately the price volatility would have evened out over that period.
Now assume that we’ve been buying equal portions of Bitcoin over the last 10 months, it becomes quite obvious that the number of times when we would have bought at a rising price tends to counterbalance the number of times in which we would have bought Bitcoin at a lower price.
Which Platform is Best for DCA for Crypto?
Platforms like Skrill, Coinbase, etc offer solutions for taking advantage of DCA when buying cryptocurrencies. The best way to take advantage of dollar-cost averaging is to automate the purchase actions so that you can limit the odds of your emotions getting in the way of regular purchases.
For example, dollar-cost averaging is integrated into Skrill through automated orders that allow you to set the number of cryptocurrencies you want to buy over time without having to manually place purchases in intervals.
Dollar-cost averaging will not necessarily make you a better investor overnight, you’ll still need to do the hard work of studying and understanding how the cryptocurrency market work. However, applying DCA can help beginners and long-term crypto investors optimize their cryptocurrency purchases to get the best value for their money.
More importantly, dollar-cost averaging can help you avoid the emotional stress and panic attack that many people experience when the crypto market dips 10% or 20% overnight after they’ve unwittingly bought crypto at the crest of a rally. Ultimately, dollar cost averaging is a nice strategy for reducing apprehension when investing in cryptocurrencies.