web3
Michael Caloca / ONE37pm
By: Alex White-Gomez
Published Mar 16, 2022
Let’s say you want to invest in a cryptocurrency like ETH, but you’re unsure of when the best time to invest is. The mathematically smartest way to do this is by implementing the dollar-cost averaging investment strategy.
What is dollar-cost averaging in crypto?
Getty Images
Dollar-cost averaging (DCA) is an investment method in which you invest a set amount of money in smaller increments at regular intervals. This allows you to profit from crypto market downturns without putting too much cash at risk at any particular moment, allowing you to maintain more liquidity and still profit from market increases.
DCA is not a new strategy, in fact, this investment method has been used for quite some time in the stock market with great success. When using the dollar cost averaging method, you are buying in at both the highs and the lows in the market.
Ultimately, DCA averages out your investments so that over time you are putting money into your choice of crypto, without being drastically affected by extremely high or low points, as much as if you were to invest a large sum all at once.
How do you use dollar-cost averaging in crypto?
Getty Images
To implement the dollar-cost averaging method, simply choose a set amount of money you want to invest into your choice of crypto, over a set period of time. Then, regardless of where the market sits, you keep investing your money until you reach your set time.
It may be a good idea to create a spreadsheet to keep track of your investments as well. Once you start investing, the most important thing to do is stay committed to your goal. This can be the hardest part of the dollar-cost averaging process, but it will be worth it in the long run.
The temptation to withdraw money from your investments once you began profiting can be hard to resist, but it’s critical that you stick to your plan in order to earn the most, and minimize your risk.
Is dollar-cost averaging a good idea?
Getty Images
Dollar-cost averaging is a good idea because it allows you to invest smaller amounts of money over a longer period of time, eliminating the fear of losing all your money. Also, it’s easier to commit to investing a small set amount of money as opposed to large sums of money all at once.
Although investing large amounts of money all at once has the maximum gains if done at the right time, DCA has been proven to avoid major losses. DCA is also important because it eliminates the physiological barrier to investing.
As well, instead of wasting your time watching the market for dips every day, you can spend your time more wisely learning a new hobby or increasing your knowledge in other ways.
How often should you invest in dollar-cost averaging?
Getty Images
You should utilize the dollar-cost averaging method as often as needed to achieve your financial goals or as your wallet allows. This may equate to days, weeks, months, or even years of investment strategy.
Keep in mind that trading platforms such as Coinbase and Gemini charge a fee each time you submit a transaction. So if you are transacting often, you are going to incur more fees when using the dollar-cost averaging method. It may be wise to extend your transactions into monthly or even bi-monthly increments to avoid these fees.
If you are investing in crypto on a weekly basis and you are paying a fee every time, this will cut into your overall profit, so transacting less frequently may be the best way to optimize your DCA investment strategy.
Also, considering that DCA is generally a long-term investment strategy, your profit gained overtime should more than cover the cost of any transaction fees you may incur.
Example of dollar-cost averaging in crypto
Getty Images
If you are looking to utilize the dollar-cost averaging method in crypto, you can use a cryptocurrency exchange such as Coinbase or Gemini to set up recurring purchases of your choice of crypto. This allows you to effortlessly invest in crypto without having to do anything except reap the profits.
For example, a person whose dollar-cost averaged into Bitcoin by purchasing $5 weekly in 2020 would have earned $692 from a total investment of $275, yielding a 160 percent return.
Is dollar-cost averaging crypto safe?
Dollar-cost averaging cryptocurrency should be approached with extreme caution and thoughtfulness. Not all crypto will result in a good return on investment. Always do your own research (DYOR) before decding to use the DCA investment strategy for investing in crypto.
However, if you DYOR and invest in a sustainable cryptocurrency, the DCA strategy is one of the safest investment strategies known in the game.
Final thoughts
Overall, if you are interested in investing in crypto but you don’t want to risk losing all your hard-earned money, then dollar-cost averaging might be the best option for you.
Simply choose your crypto, decide how much money you want to invest, and then figure out the best increments in which you want to buy crypto and for how long. Play your cards right and you may just end up with a good hand.
Slide 1 of 3
- Choosing The Right NFT Project For You
- Reviewing the Top NFT Data Analysis Tools
- 12 NFT Business Ideas You Can Start Today
Did you like this article?
Liked
Disliked
More from one37pm
See More
I'm well-versed in investment strategies, particularly dollar-cost averaging (DCA) and its application in the cryptocurrency market. Dollar-cost averaging involves regularly investing fixed amounts of money at scheduled intervals, mitigating the risk associated with market volatility. This strategy has been a longstanding method in traditional stock markets, known for its ability to balance investments across market highs and lows, leading to a more consistent average investment over time.
In the context of the article, here are the key concepts:
-
Dollar-Cost Averaging (DCA): An investment method involving consistent, fixed investments at regular intervals regardless of market fluctuations. It's a strategy designed to mitigate risk by spreading investments across varying market conditions.
-
Crypto Market Dynamics: Discusses the nature of cryptocurrency markets, their volatility, and the potential benefits of DCA as a strategy for minimizing risk and gaining exposure to crypto assets without risking large sums of money in a single transaction.
-
Implementing DCA: Explains how to use DCA in the crypto market by setting a fixed investment amount over a chosen period. It emphasizes commitment to the strategy to reap long-term benefits and suggests using tools like spreadsheets to track investments.
-
Advantages of DCA: Highlights the advantages of DCA, such as reducing the fear of losing invested money, avoiding the psychological barriers to investing, and enabling individuals to spend time on other productive activities instead of constantly monitoring market fluctuations.
-
Frequency of DCA: Advises on the frequency of DCA based on financial goals and transaction fees on trading platforms. It suggests adjusting the frequency to minimize transaction fees and maximize overall profit over time.
-
Examples and Caution: Provides an example of the potential returns through DCA and emphasizes the need for caution, research, and due diligence before employing this strategy in the volatile crypto market. It stresses the importance of investing in sustainable cryptocurrencies.
-
Final Thoughts: Concludes by reiterating the suitability of DCA for those seeking a less risky approach to crypto investment and emphasizes the importance of strategic planning and commitment to the chosen investment.
Understanding these concepts can empower individuals looking to enter the cryptocurrency market with a more balanced and risk-mitigated approach using dollar-cost averaging.
