Dollar-cost averaging: Crypto trading cemented high finance’s mainstream status, even as Robinhood’s zero-commission trading popularized its arrival. In the past two years, the number of tutorials and influencers specializing in digital assets has risen. The two main categories of trading strategies—”set it and forget it” and “daily trading”—were quickly identified.
The second option is more stressful because it is based on daily price changes. On the other hand, dollar-cost averaging (DCA) provides a compromise. Spreading out investments rather than timing market entrances exactly allows for a more balanced distribution of risk instead of riding a price wave with a huge chunk of money. We need to know why DCA is necessary before we can get into its details.
Crypto Market’s Inherent Volatility
Penny stocks, like cryptocurrencies, are notoriously unpredictable in the stock market. The word “penny” comes from their very low market capitalization. Consequently, greater deals have a more significant impact on assets with a smaller market cap. It’s the same as traversing a small lake instead of an ocean.
A trader, or “whale,” needs a huge market cap to make a splash. Similarly, whales’ size is irrelevant regarding tiny market cap assets (those with a market cap of less than $2 billion). This is why trading cryptocurrencies with small caps is fraught with danger. This is how whales make their millions: by imitating these walls, they lure in traders and pump and dump.
For another reason, these actions have repercussions for digital assets with mid-caps of $10 billion or more. Unlike a product-based business, cryptocurrencies do not have inherent worth. Products, costs, demand, and an approximate valuation can all be better understood in this context.
These measures could assess a corporation’s stock value. On the other hand, cryptocurrency is much more theoretical. Its value is based on the belief that it provides a better alternative to centralized banking and payment networks. For example, no one entity can artificially inflate the price of Bitcoin because of its decentralized and restricted supply of 21 million coins.
DCA beats volatility
The Federal Reserve’s dollar-related initiatives aided a 40-year peak in inflation in the past two years. The value of the dollar declines as a result. Now, with the value of an asset steadily declining, who would want to put their money there? The consensus among those who engage in such speculation is that Bitcoin is the superior option for storing value. This is the service that Bitcoin offers, like a software firm without a chief executive officer.
In addition, the Lightning Network improves Bitcoin’s utilities, enabling the same kind of near-zero-cost, ultra-fast transfers as the Visa network. Despite its current market cap of $731.5 billion, Bitcoin is still vulnerable to speculation and volatility.
Volatility can be significantly impacted by factors such as the Federal Reserve’s decision to tighten monetary policies, the retreat of institutional investors, and geopolitical tensions. Cryptocurrencies, in contrast to more static assets such as gold, are attractive due to their volatility. Because what other way is there to amass gains of 2x to 10x quickly? One strategy that can help mitigate the negative aspects of volatility is dollar-cost averaging (DCA).
What is Dollar-cost Averaging (DCA)?
If you’re a risk-averse investor, one risk-averse method is dollar-cost averaging, which involves buying into the market in small quantities over time. By dividing up the risk, the investor might profit from market volatility. Many times in the past few months, bitcoin has dropped below $40,000, and on others, it has dropped below $35,000.
Thus, a hypothetical investor could use DCA to invest $10,000 in increments of $10,000 every day, week, or month rather than putting all that money into one large investment. Otherwise, the investor may invest the full $10,000 all at once, even if it means paying a higher price. If investment increments were to occur at low valley points, the overall gains would be significantly lower.
With that said, the DCA investing strategy can also:
- Be employed within all money ranges: $10, $100, $10,000, etc. After all, while $10 is small for someone, by the same token, other investors view $10k as small.
- It can be employed regardless of the market, as the investment distribution is consistent over time.
A DCA investor needs absolute faith in the asset’s underlying value. The fundamental idea behind dollar-cost averaging is to put money in regularly. Simply put, dollar-cost averaging means spreading the investment capital over a longer period to spread out the risk. To do this, one must be self-disciplined and stand firm in market FUD.
What is the Operating Principle of DCA?
Consider a hypothetical two-year investment of $10 per day into Bitcoin. You would have put in a total of $7,310 if you had begun doing it in 2020 and continued until now. In exchange, what would you receive?
You would have made $22,965—a profit margin of 214.16%—had you used a DCA calculator. You will earn a profit of $7,310 after deducting $10 from your daily investment for two years, which will be less than the appreciation of Bitcoin. Many people wonder where the price of Bitcoin will go from here, but looking at its historical chart reveals that it has been going up. In other words, during the worst bear market times, bitcoin’s new lows consistently exceed the prior lows.
Given that Bitcoin will always have a finite supply, this makes perfect sense. Bitcoins will always have a finite value if more individuals are interested in buying them. Supply and demand, the first and most basic rule of economics, is at play here.
Advantages of DCAs
Long-term bullish market timing is intrinsic to dollar-cost averaging investors. Investors with DCA would jump in amid a price decline, relying on long-term fundamentals, while others would panic-sell. This suggests that dollar-cost averaging is good instead of just holding.
Also sure of Bitcoin’s long-term appreciation are holders. But investing when increments are falling seems like a pointless chore to them. On the contrary, DCA investors would be better off in the long term if they forego buying unnecessary items and instead invest that tiny amount in BTC when its price is low. In addition, overtrading is not an option with DCA because investments are made at modest regular intervals. Preventing both monetary and emotional harm is of the utmost importance.
Finally, DCA lets you assess the confidence of your asset rather than relying on the often inaccurate technical analysis (TA). Similarly, DCA enables altcoin-wide diversification and risk budgeting.
Drawbacks of DCAs
This investing approach has few drawbacks since it is low-risk and relies on the cryptocurrency market’s inherent volatility. Entering the market with a huge sum all at once may not be the most profitable strategy, but it could be in the event of a protracted bull trend.
If this scenario played out, DCA would see smaller gains. But ordinary people rarely have that kind of cash on hand to invest. Another thing to think about is the costs associated with bitcoin trading platforms. Trading fees are higher for DCA because of the increased frequency of trading. However, as dollar-cost averaging is a strategy for the long run, these additional expenses would soon become little in comparison to the benefits.
Dollar-cost Averaging: Ideal for Volatile markets
The more unpredictable cryptocurrency market makes dollar-cost averaging an even more profitable technique. Crypto investors can now enjoy the best of both worlds: the short-term excitement of speculation and the long-term stability of blockchain projects. You may argue that many smart-contract platforms have an even bigger long-term appreciation window than Bitcoin, which is why it was used as an example in this book. However, bitcoin does control the entire crypto market.
Dollar-Cost Averaging (DCA): After all, a suite of decentralized and open financial services—like Radix, Ethereum, Cardano, Polkadot, Avalanche, etc.—will supersede traditional banking. Despite the lack of gateways, they have shown their use cases, making their future bright.
However, few will join until it becomes second nature because of the level of personal effort required. Volatility occurs during this adoption window, and DCA is the optimal risk-investing approach.
