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This article will give you an overview of what is Dollar Cost Averaging strategy is in respect to digital currencies.
Cryptocurrency day trading has risks, requires a significant amount of time, and research. Moreover, the fluctuations in the values of the cryptos may result in active traders losing a good amount of money. Therefore, there are many investors who prefer to follow strategies that are less time consuming and also hold fewer risks. Dollar Cost Averaging which is also known as DCA is among those strategies which are used by the investors to create long-term wealth over a prominent period of time.
In this method, the positions of investments are formed by investing equal amounts of money at a period interval.
What Is Dollar Cost Averaging?
DCA which is also at times referred to as ‘constant dollar plan’, refers to a plan of investment that benefits the investors by discarding actions that are based on emotions. Using this Dollar Cost Averaging approach, price fluctuations can be navigated by the trader by distributing the buys across a fixed period of time. Rather than putting a good amount of investment into a class of asset, an investor chooses to invest a fixed amount every week, every month, or even on a semi-month basis, unhindered by any price alterations. There is a difference in Dollar Cost Averaging weekly vs monthly basis.
Generally, this strategy is thought to be a powerful and simple strategy, especially for beginners or the traders who wish to spend too much time on the technical dimension of evaluating the market. Dollar Cost Averaging is especially ideal for investors who wish to make long term investments. An investor who employs this method commits to a sequence of investments where a fixed portion of the fund is invested regularly on a specified crypto asset.
While many investors are horrified to invest or nervous about entering the market at the right time, this strategy offers the investors with a committed structure of the investment. It should be taken into account that this strategy of investment offers better results in the time of a bear market.
How Dollar Cost Averaging Works?
The initial step with Dollar Cost Averaging is to evaluate the total amount of money that the investor is planning to invest in a specific asset. Instead of investing the complete amount at the same time, the investor is required to spread that money over a period of time. These investments can either be done manually or via mediums like 401(k) plans that will automatically do the job for the investor. After starting the plan, the purchases will take place automatically despite any market changes.
Here is a Dollar Cost Averaging example. For instance, let us assume that the investor is planning to invest a total of $3,000 that is spread across a time span of 3 months on ‘C’ tokens. That implies that every month that investor is required to buy a ‘C’ token that is worth $1,000. In addition, the price of this ‘C’ token is fluctuating constantly which implies that your $1,000 will help you to purchase a different number of ‘C’ tokens each month.
Presume the value of the ‘C’ token in March was $10, and the investor managed to purchase 100 C tokens. The next month, the market price of C coins decreased to $5, and the investor managed to buy 200 C coins with $1,000. The following month the market value of C increased to $25, implying that the investor bought 40 C coins. Let us work for the initial three months.
Month | Investment | The market value during the purchase | Number of C tokens bought |
1 March | $1,000 | $10 | 100 |
1 April | $1,000 | $5 | 200 |
1 May | $1,000 | $25 | 40 |
Now, if we were just looking at the above Dollar Cost Averaging calculator, it is obvious in retrospect that April would have been the most advantageous month to purchase. By applying the strategy of DCA, a trader creates a long-term position while a downtrend operates its course. Moreover, the trader alleviates a certain portion of risks by purchasing in a downtrend.
Along with that, there is no method for evaluating the market manner in the short term. It is simpler to make long-term price predictions than judge what alterations will take place next month or week. Besides, it is not always possible to have bigger amounts of money to invest at one time; many investors might find it much convenient to set aside a fixed amount each paycheck.
So, the main Dollar Cost Averaging benefit is that it magnifies the gainfulness of the investor’s investment by exploiting a decrease in price. Other important benefits include avoiding the risks that are associated with mistiming the market, helping in avoiding making decisions that are dependent on emotions, and lastly, it is best for long-term investors.
Conclusion: Is DCA Possible For Cryptocurrencies?
Dollar cost averaging is an ideal investment approach for any fluctuating asset class. When it comes to price fluctuations, cryptos like Ethereum and Bitcoin certainly fit the bill. It is tough to predict the prospects of price shifts, but purchasing dips on a frequent basis can be highly profitable. The Dollar Cost Averaging Bitcoin is thought of as a quite profitable option.
Across the crypto space, the general idea is that this strategy is generally a much safer investment option than investing the complete amount at once. Also, it is a powerful investment choice, mainly for novice investors and those reluctant to bother themselves with common technical analysis. Furthermore, with its huge price volatility and the possibility for expansion in the future, HODLing cryptos stay a very profitable option for investment.
Frequently Asked Questions On Dollar Cost Averaging
1. Is Dollar Cost Averaging a Good idea?
DCA is a powerful investment choice, mainly for novice investors and those reluctant to bother themselves with common technical analysis.
2. How do you explain dollar cost averaging?
DCA which is also at times referred to as ‘constant dollar plan’, refers to a plan of investment that benefits the investors by discarding actions that are based on emotions. Using this Dollar Cost Averaging approach, price fluctuations can be navigated by the trader by distributing the buys across a fixed period of time.
3. Is DCA a good strategy?
Generally, this strategy is thought to be a powerful and simple strategy, especially for beginners or traders who wish to spend too much time on the technical dimension of evaluating the market.
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