IF YOU’D INVESTED $5 WEEKLY IN BITCOIN FOR THE PAST 3 YEARS DESPITE THE BEARS, YOU’D BE UP 51%!
Here’s how “dollar-cost averaging” (DCA) beat other investment strategies.
I’ve had a couple of people message me about getting their crypto journey started. Eventually, some of them personally feel they’re not cut out for trading, or they have a time-consuming job and would just prefer some passive strategy of investing.
With a lot of investing strategies being churned out in the crypto space (lending, staking, etc), there is no want of options.
However, if you’re looking to build a long-term position in a particular cryptocurrency that you’ve deeply researched, dollar-cost averaging (DCA) would prove a better strategy as it would help reduce a certain level of risk associated with the high volatility of cryptocurrencies.
What is dollar-cost averaging?
DCA is a strategy used by investors to reduce the impact of volatility on the assets they purchase. It is often used to build a long-term position on any asset.
It simply involves buying a fixed USD amount of that asset at regular intervals (for example weekly).
Timing is one of the most difficult things for even experienced investors; so DCA helps reduce the chances of buying at the wrong time by averaging out on the entry price over the long-term.
Let’s say you plan to buy an asset like Bitcoin with $5000;
If you do it all at once, chances are you’ll get in at unfavorable prices if the market is in a bear season. Meanwhile, using DCA will give you a probable chance of getting in at even lower prices, smoothening your entry overtime.
When a downtrend is expected to last a couple of years, dollar-cost averaging is a preferred strategy for accumulating an asset.
Let’s get this: the last few years have been a bear season in crypto. The price of Bitcoin has gone from its $20,000 high of 2017 to $3000 lows and bounced.
However, if you had practiced DCA by investing $5 in bitcoin every week for the past 3 years, you’d be up by at least 51% today, putting into consideration the volatility.
With weekly $5 buys, you’d have invested a total of $785, with a return of 51.16% in profit. See the image below for confirmation.
You can find this nice DCA calculator here
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Dollar-cost averaging has its cons though.
It’s not best suited for a bull market as investors will lose out on gains they would have made had they gone all in at once. Also, depending on how you spread out your investment, it might take a significant amount of time to get good exposure to the asset and that might leave you behind.
On the flip side, with DCA, you’ll have the opportunity to buy the asset at a discount when the price goes down.
Another good thing about DCA is that it reduces your risk of buying the top. Also, you have ample time to learn about the asset you’re buying up without being heavily exposed.
Final thoughts:
Dollar-cost averaging is not a guarantee you’ll have a profitable investment as there are other factors to consider in investing. However, you’ll reduce the risk of poorly timing the market, especially in a downtrend.
While this strategy may not be perfect for every market scenario, it remains one of the best strategies to gain exposure to any cryptocurrency you’re investing in.
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