What Is Dollar Cost Averaging?

What Is Dollar Cost Averaging? | mypatricia.co

Entering the crypto market is tricky for many new entrants. One of many reasons is the highly volatile nature of cryptocurrencies, which makes market movement unpredictable.

The good thing is there are several strategies proven to minimize the risk involved in crypto trading. One such of such is dollar-cost averaging (DCA), which helps to build wealth over time. In essence, dollar-cost averaging is a suitable investment strategy for beginners or individuals who do not want to burden themselves with the technical aspect of market analysis.

Not entirely sure how this helps? Continue reading to know more about this strategy and how to use it effectively in your crypto operations.

For the sake of this example, we will assume that you intend to invest a total of $1000 in cryptocurrency. So, you will spread your capital over multiple purchases.

Let us say that you have a plan for buying crypto coins over the next four months. In other words, you set aside $250 per month. Perhaps the price dips steadily such that at each predefined time and prices fall to $50, $35, $30 and $25. In this case, the $1,000 investment capital has accrued 30.4 shares.‍

How It Helps In A Bull Market

So, the truth is that this strategy is not as potent in a bull market as in a bear market. When your purchase prices increase over time, the shares accumulated will be lesser than the number of shares you would have bought with a lump sum. For instance, you can split $1,000 equally across four purchases, and the prices per share are $50, $65, $70 and $80. With this purchase plan, you will end up with 15.5 shares.

The good side to this for you is that the market is volatile. Who knows, prices may tip in your favor.‍

What Are the Benefits of Dollar-Cost Averaging?

From the examples above, it is safe to say that dollar-cost averaging amplifies the profitability of investment by taking advantage of price dips. Other advantages include:

  • It helps avoid risks arising from the mistiming of markets;
  • It eliminates emotion-based investment decisions;
  • It is suitable for those interested in long-term investments.‍

Conclusion

Dollar-cost averaging is a potent investment strategy for beginners and less technically-inclined investors, especially when investing long-term in a volatile market. As discussed in this guide, the probability of mistiming the market is low, and the risks resulting from emotion-based investment decisions are reduced.

Patricia Technologies Limited is a fintech company that trades bitcoin and other cryptocurrencies.