The value of Bitcoin and other cryptocurrencies can fluctuate significantly on a daily (or even an hourly) basis. As is the case with all types of investments, volatility can generate feelings of uncertainty as well as the dread of losing out or not taking part at all. How can you choose the best time to make a purchase when prices are always changing?
In a perfect world, making money would be as easy as “buy low, sell high.” Even for those with extensive experience, putting this into practise can be challenging. Instead of trying to “time the market,” many investors employ a strategy known as dollar-cost averaging (or “DCA”) to reduce the blow of market volatility on their portfolios. This strategy involves regularly investing an smaller amount of money into an asset, such as cryptocurrency, stocks, or gold.
DCA(Dollar-cost averaging) is an option that should be considered when an investor anticipates that their investments will gain (or grow in value) over the long run but will go through periods of market volatility along the way.
What is DCA?
The Dividend Cost Averaging (DCA) investment strategy is long-term strategy in which an investor customers have with the brand smaller amounts of the asset over the course of a period of time, regardless of the price (for instance, investing $100 in Cryptocurrency every month for year rather than $1,200 all at once).
DCA is a strategy that has been around since the 1970s. Their DCA schedule could shift over time, and its duration might range from a few months to many years, depending on the goals they set for themselves.
Traditional investors used this method for years to weather the volatility of the stock market. Despite the fact that DCA is popular way to purchase Bitcoin, it is not exclusive to the cryptocurrency space. If you contribute money to a retirement plan offered by your company on a regular basis, you might even be using DCA already.
What are the benefits of DCA?
DCA can be an efficient approach to own cryptocurrency without the notoriously challenging job of timing the market or even the risk of unintentionally using all of your savings to invest “a lump amount” at a peak when prices are at their highest.
The most important thing is to select an amount that is within one’s financial means and to invest consistently, regardless of the value of the asset. This has potential to “even out” the price of buys over time & lessen the total effect of a quick reduction in prices on any individual purchase.
Additionally, this has potential to lower the overall cost of any given purchase. And if values do drop, DCA investors can keep buying as planned, with the possibility of earning returns if prices rise again.
How does DCA work in practice?
It should come as no surprise that the performance of any DCA approach is still dependent on the state of the market. To illustrate this point, let’s take a look at an example based on actual world prices just as they were getting close to experiencing Bitcoin’s largest drop to date.
If you started making weekly investments of $100 in bitcoin on December 18, 2017 (which was close to the price peak for that year), you would have a total investment amount of $16,300. On the other hand, your investment portfolio will be worth nearly $65,000 on January 25, 2021, which is a return on the investment of much more than 299 percent.