Understanding Dollar-Cost Averaging
Dollar-cost averaging involves investing a fixed amount at set intervals, whether that's weekly, bi-weekly, monthly, or more. That might mean you buy $50 of Bitcoin every Monday at 10 a.m. No matter what the market is doing, you'll go ahead and make that purchase.
It works well for long-term investors and can be particularly effective with volatile assets. As such, it isn't so surprising that so many crypto investors have embraced DCA. A recent survey by Kraken found that over 80% of investors had used DCA at some point, while 59% said it was their primary investment strategy.
Pros and Cons of DCA Investing
The main warning of DCA investing is that, like most buy-and-hold investors, it assumes that prices will rise over time. Because of this, it's even more crucial to conduct research so you know why you're making the purchase
Pros of DCA
If you're investing a portion of your paycheck, for example, DCA works effectively. Find out the fine print for your crypto exchange or brokerage to see how to schedule a frequent buy. Benefits include:
- Decreases emotional decision-making: When emotions take over, it is far too simple to panic purchase, sell, or freeze.
- Balances out volatility: Market swings can be lessened by purchasing at both high and low prices.
- Build your portfolio gradually: One effective strategy to increase money is to make steady investments.
Cons of DCA
DCA isn't appropriate for everyone, but it will work for many investors. The following are some drawbacks:
- Discipline is still necessary: It could be tempting to quit investing over extended periods when your portfolio is losing money.
- Investments made in one lump sum could perform better: According to studies, investing a large sum of money in the stock market at once rather than dividing it up into smaller investments can sometimes yield higher returns.
- Additional Fee: In more volatile cryptocurrency markets, such reasoning might not hold. You might have to pay additional fees. Your returns may be reduced if you have to pay a fee for every transaction.
How DCA Might Work in Practice
To help you understand how it would function in practice, find out Bitcoin values. The following table illustrates the potential outcomes of purchasing $100 worth of Bitcoin at the beginning of each month in 2022 and 2023. In the end, the method makes more than $1,000.
However, it would be difficult to endure those 11 bolded months in the middle, when the value of your portfolio was far lower than what you had invested. When you are certain that the cryptocurrency you are purchasing will have a strong long-term performance, DCA might be a great method to reduce the impact of volatility.
