What is Dollar-Cost Averaging in Crypto Trading?

What is Dollar-Cost Averaging in Crypto Trading?

Are you new to the crypto trading world? As someone who’s not well-versed with the world of trading, the first and most common question that strikes is “When should I invest?”

Trading in the crypto market comes with its own sets of pros and cons. However, it always helps to know a little about the subject you’re delving into. The market can be highly volatile, so a sound investing strategy and a calm head are required.

Due to the high fluctuation of the market, action needs to be taken at the drop of a hat, or patience may need to be practiced. Timing the investment is the key to prospering in the crypto market.

Time is a crucial factor and has the potential to turn the tide in your favor, i.e., maximize profit with low risks. The issue is that there is no easy way to time the market, thanks to its’ highly volatile nature. Attempting to figure out the time can be an expensive, time-consuming process that could result in a loss of your investments. You could invest too late, too early, or overthink your analysis and not get to the investment part at all.

A well-known strategy could be to invest and then forget if the asset you have invested in goes down by a considerable margin the consecutive day. After that, you must patiently wait for your loss to be compensated.

Another investing strategy to manage entry points that you could employ is Dollar Cost Averaging (DCA). It is known to be effective despite the prices of the assets. Here, investors divide investment options and continue purchasing assets at regular intervals.

The exit timing is every bit as critical as the entry. You can grow your investment portfolio by ascertaining the entry points, but your exit is when you realize your profits. It would be best to remove the profits once your price target is reached.

Dollar-cost averaging is a tried and tested remedy that applies to many investing elements, including but not limited to crypto trading.

What is Dollar Cost Averaging (DCA)

Dollar-cost averaging is a strategy used by investors for developing wealth gradually, with time, while lowering the impact of long- and short-term volatility. Alternatively, also known as a constant dollar plan, DCA is a method where you divide your total sum of money and invest for a specific period. It is contrary to investing the lump sum all at once.

This strategy will ensure that your purchases go through continuously, heedless of the movements of the market or the asset’s value. This strategy is preferred by investors wanting to back certain assets like crypto, stocks, commodities, etc., for the long term.

Virtually all markets undergo cycles where the asset's value increases or decreases over a specific period. After that, investors using dollar-cost averaging might be able to purchase a lower number of shares when the prices are high, but they will also be able to buy more shares when the prices are lower.  

A DCA strategy may not always ensure the purchase of assets at best possible price, but it cuts down much of the complicated work that goes into trying to time the market.

How does it work?

With DCA, you begin with the total amount you want to invest, along with our chosen crypto. Then, instead of dishing out the total sum, you can invest it in smaller installments over a particular time. You can place your DCA trades manually, but specific plans can do it for you. Once you select a plan and set it up, your purchases will recur automatically, regardless of the price of market movement.

Committing to DAC would mean investing when the market or the asset you’re investing in has dropped in value. There are also times when you will be buying during a sell-off- wherein a massive amount of assets are sold in a minimal period. Some are reluctant to purchase. Some may be reluctant to buy during a downtrend market. But if seen from another perspective, purchasing during price decline presents the opportunity to obtain possibly profitable assets at low prices. Conversely, in an uptrend market, a scaled sell plan can be adopted when the prices are high.

Is DCA viable with Crypto?

Dollar-cost averaging is similar to ordering a recurring buy on a crypto exchange. Cryptocurrencies have been highly volatile, often more so than stocks. Potentially, a more significant profit can be achieved from buying during downtrends and selling during uptrends.

Though, there is a consensus that DCA has minimal risks overall compared to lump sum trading. It is a low-risk, low return strategy, but it still offers an opportunity of gaining from market swings.  

With the fluctuation seen in the crypto market, and its prospects for future growth, holding digital assets remains a beneficial investment method.

And if you want to opt for a relatively secure way of profiting from crypto’s volatility, then a DCA could be your best bet.

Why is DCA an excellent investing strategy?

Dollar-cost averaging is an excellent strategy as it offers the following benefits while investing

  1. Lower Cost
  2. Risk Reduction
  3. Disciplined Saving
  4. Ride out market downturns
  5. Prevents Bad Timing
  6. Manage Emotional Investing

DCA is a reasonably easy and effective investing strategy for new players, and it involves periodic investments of a specific amount. This strategic strategy will suffuse your trading mindset with confidence and aid in preventing emotional investments.

With the fluctuation seen in the crypto trade, DCA seems like an excellent option to start crypto trading. Its minimal-risk and practical strategy will enable organic portfolio growth without suffering huge losses.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. C-Trade, its affiliates, agents, directors, officers, or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.