If you’re new to investing in cryptocurrencies, it can be tempting to try and time the market to get the best possible deal. But as any seasoned investor will tell you, market timing is a risky business. Instead, one of the best strategies you can use is Dollar Cost Averaging (DCA). In this post, we’ll explore why DCA is a smart approach to buying crypto, and give a step-by-step example using Bitcoin from 2019 to 2021.
What is Dollar Cost Averaging?
Dollar Cost Averaging is a strategy where you invest a fixed amount of money (What you can afford to lose) into an asset at regular intervals, regardless of the market price. This approach means that you’ll buy more of an asset when prices are low and less when prices are high. Over time, this averages out the cost of your investment, so you don’t have to worry about timing the market perfectly.
“What you can afford to lose” is a statement often said in traditional finance that has been adopted into crypto by mainstream users.
A weekly small investment of any amount of money that you can afford to lose, like skipping a cup or two of Starbucks, or maybe the money saved from quitting smoking, cutting back on expensive activities, or just tossing change aside every week. Money that won’t be missed, that maybe you would have spent elsewhere on frivolous things, could be money spent on investments in crypto or other markets.
Why is DCA better Than Market Timing?
Market timing can be incredibly difficult, even for experienced investors. Trying to predict when prices will rise or fall can lead to missed opportunities or significant losses. DCA takes the guesswork out of investing by spreading your purchases over time. While you may not buy at the absolute bottom of a market, you also won’t buy at the top. This strategy helps smooth out market volatility and reduces the overall risk of your investment.
DCA Example: Bitcoin from 2019 to 2021
Let’s say you decided to invest $10 per week in Bitcoin using DCA from 2019 to 2021
Bitcoin at $10 per week for a year from 2019-2021 would have paid off for an investor like this:
- March 2019: Investor starts DCA Bitcoin at $10 per week, buying 0.001 BTC each time.
- May 2019: Bitcoin price is around $7,000. Investor has accumulated around 0.014 BTC so far.
- September 2019: Bitcoin price drops to around $8,000. Investor continues to DCA at $10 per week, buying 0.001 BTC each time.
- December 2019: Bitcoin price rises to around $7,000, then drops to around $6,000. Investor has accumulated around 0.06 BTC so far.
- March 2020: Bitcoin price drops to around $4,000 due to COVID-19 pandemic fears. Investor continues to DCA at $10 per week, buying 0.0025 BTC each time due to the lower price.
- June 2020: Bitcoin price rises to around $10,000. Investor has accumulated around 0.17 BTC so far.
- September 2020: Bitcoin price rises to around $11,000. Investor has accumulated around 0.26 BTC so far.
- December 2020: Bitcoin price rises to around $20,000. Investor has accumulated around 0.4 BTC so far.
- March 2021: Bitcoin price rises to around $60,000. Investor has accumulated around 0.7 BTC so far, which was worth around $42,000 at the time.
The benefits of DCA go beyond reducing market risk. It can also be a cost-effective way to invest over time. By spreading your purchases out over regular intervals, you can avoid the temptation to make emotional investment decisions based on short-term market fluctuations. Additionally, DCA can help you avoid transaction fees associated with buying and selling crypto. While these fees may seem small, they can add up over time.
Conclusion on DCA
Dollar Cost Averaging is a smart strategy for investing in cryptocurrencies, especially if you’re new to the market and investment strategies.
By investing a fixed amount of money at regular intervals, you can avoid the pitfalls of market timing and take advantage of market volatility. As we’ve seen with Bitcoin’s recent surge in price, DCA can also be an effective way to build your portfolio over time with other currencies.
Take some time learning more about DCA and which platforms might be right for you, and always remember to do your own research.
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