How to use DCA (Dollar Cost Averaging) in Crypto in 2022
Crypto bear markets are the best time to apply Dollar Cost Averaging as an investment strategy. Here’s how to use it in 2022.
The crypto market is notorious for its volatility. This means that trying to time the market can be very difficult. However, investors have a variety of strategies they can choose from when it comes to managing their money.
People are always stuck between the choice to either invest all the money at once or spread it over a period of time. The former is usually driven by emotions. On the other hand, those who go for the second option might be unknowingly opting for a strategy called dollar-cost averaging. This strategy is safer for risk management, especially if you are relatively new to investing.
Before you dive in with your money, here are a few things to know.
What is DCA (dollar-cost averaging) and How does it work?
DCA (dollar-cost averaging) is an investment strategy where you spread out the purchase of any particular asset by investing equal dollar amounts at regular intervals, regardless of price volatility.
Let’s say you have $1000 to invest in, for example, Bitcoin. Instead of making a one-time purchase, you can choose to invest $100 into Bitcoin every week. Doing this will spread the cost over 10 weeks. DCA could be done daily, weekly, or monthly. The choice of timeframe is totally dependent on the individual. However, a weekly basis seems more optimal as it allows you to spread out the cost over a not-so-long or so-short period of time.
The general idea with dollar-cost averaging is to level out your cost basis over time, thereby minimizing your overall risk and the negative impacts of volatility.
The strategy does not guarantee that your investment will be successful. After all, if the asset price keeps going up during the course of your spread, you will end up paying more for smaller units than you would have if you had bought them all at once.
In any case, it is still a preferred strategy for investors who are looking to properly manage risk while participating in any potential cryptocurrency market upside.
Dollar-cost averaging focuses on consistency and not market timing, thereby eliminating emotions that would have otherwise influenced investing decisions.
For those looking to build up a long-term position in any particular cryptocurrency, it can be a useful strategy. By spreading the purchase cost over time, you might end up paying lower for the assets.
Pros and Cons of DCA
The DCA strategy comes with both Pros and Cons.
Pros
By investing fixed amounts at regular intervals, the strategy enforces consistency and eliminates fear which can lead to poor investing decisions.
The lower the market prices, the more units you can purchase at better discounts
It allows you to build a long-term position over time, even if you do not have a lot of cash to invest at once. DCA is perfect for both small and large investors.
Risk-averse investors can find a safe model in DCA. This prevents them from panic-selling and missing out on potential gains.
Cons
You could miss out on potential gains if the market goes up over your spread, as opposed to investing it all at once
Using DCA, it would take a longer time to build up a significant position.
You will spend more on smaller units if the market goes up over the course of your spread.
In addition, you could end up paying more in exchange fees than you regularly would off one purchase. Make sure to research fees on different exchanges.
DCA and Crypto in 2022
The most important thing about dollar-cost averaging is not knowing how, but when to apply it. While dollar-cost averaging is a suitable strategy for risk management, looking through the cons above, it is notably best used in a bear market.
Bear markets are characterized by market pessimism and falling prices. The crypto market has been in a downtrend over the last seven months, which makes it a suitable time to DCA into your preferred assets.
If history is anything to go by, it should be a while before the cryptocurrency market goes back to previous highs, buying you time to spread your purchase.
As with any investment instrument or strategy, there are always risks involved. Ensure you conduct due diligence on the asset and the market trend before deciding whether to apply the DCA strategy.