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?
What is dollar-cost averaging in crypto?
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?
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?
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?
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
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.
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.