There are various strategies for investing in assets, including cryptocurrencies. An interesting concept is dollar-cost averaging (DCA), described by Benjamin Graham in his book titled “The Intelligent Investor.” It’s based on simple principles – cyclically investing the same amount of dollars in the same asset every month or quarter. Find out from the article what this strategy entails – opportunities, risks, and whether it is worth implementing for crypto-assets.
How does DCA work in practice?
If you want to invest in a particular coin with the DCA strategy, the first step you should take is to determine what you are investing in and how often. For example, it could be Ethereum, which will be bought every quarter for 5 years for $1,000. On some platforms, you can set up a standing order, where you will automatically purchase a certain amount of cryptocurrency on a given day in selected months. This strategy requires patience and mental resilience to market fluctuations. A panic selling during its implementation can derail its results. Once you choose, you should hodl your assets for the indicated time.
The notion of “hodl” is a humorous term for people who hold on “too long” to their assets without ever selling them and losing the possibility of high earnings during a bull market. In the case of DCA, hodl is periodic, and it is advisable.
Interesting fact – in the UK, the analogous substitute for DCA is pound-cost averaging, which will be analogous for other countries and currencies where the strategy would be used. Its essence is not the currency for which we buy but the method we use based on three variables – time, asset, and cyclicality.
Advantages and disadvantages of dollar-cost averaging
There are many advantages to using the DCA strategy. Below is a list of them to help you consider whether the strategy will be optimal for you. Keep in mind that we are not encouraging you to use it but only describing its potential benefits.
Pros of dollar-cost averaging (DCA):
Reduces the impact of market volatility: by investing a fixed amount at regular intervals, an investor is able to purchase more shares when prices are low and fewer shares when prices are high, which can help to reduce the overall average cost of the investment.
Increases the chances of achieving a positive return: buying more shares when prices are low makes an investor more likely to achieve a positive return over time.
It helps to take the emotion out of investing: by following a systematic investment plan, an investor is less likely to be influenced by short-term market fluctuations and emotional impulses.
Easy to implement: DCA is a simple and straightforward investment strategy that does not require a lot of knowledge or expertise to implement.
Convenience: thanks to platforms that allow the automatic purchase of specific assets (exchange offices, exchange platforms), you can set a standing order for a given period. That means a small number of operations and, thus, the convenience of using a strategy that does not require hours of chart analysis.
Regular savings plan: It can help to establish a regular savings plan, which can be beneficial for long-term investment goals.
Cons of dollar-cost averaging:
May not always achieve the best results: while DCA can help to reduce the overall average cost of an investment, it may not always achieve the best results. In a rapidly rising market, for example, an investor may miss out on significant gains.
Requires discipline and commitment: to be successful with DCA, an investor must be disciplined and committed to investing a fixed amount at regular intervals, regardless of market conditions.
May not be suitable for short-term investment goals: DCA is best suited for long-term investment goals, as short-term market fluctuations can have a significant impact on the overall value of an investment over a short period.
Not always the optimal strategy: the best method depends on the investment horizon, risk appetite, and other factors depending on your personal approach.
Dollar-cost averaging is a good option for investors who prefer a combination of convenience and risk reduction. Remember that earning money on your investments is a process. In the cryptocurrency industry, patience can sometimes be the key to success, so hodl your assets can be beneficial. It’s essential not to take too long because good timing in liquidating your assets means a reward, which can be reinvested.
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