Tl;dr: There is more than one way to invest in cryptoassets. Dollar cost averaging – or buying a smaller portion of assets over a longer period of time – is an investment framework that has stood the test of time, helping millions invest while reducing their capital to short-term volatility that often plagues many markets. Learn more about Dollar-cost averaging (DCA) below.
What is Dollar-Cost Averaging?
Let’s say you just received $1,000 that you’d like to invest in Bitcoin. You could immediately buy $1,000 worth of Bitcoin – but what if the Bitcoin price goes lower tomorrow?
That’s the worry that many investors have, which is why they ultimately never invest in the first place: Their fear of short-term price fluctuations prevents them from ever entering the market!
Enter: Dollar-cost averaging (DCA), a technique used by investors to reduce the impact of market volatility on their investments. It involves investing equal amounts of money at regular intervals, regardless of whether the market is going up or down. In this example, instead of investing $1,000 all at once, the investor would split the $1,000 into 10 portions, and invest $100 once a week, every week, for 10 weeks.
The concept behind DCA is that it allows you to buy more shares or portions of your target investment when prices are low, and less portions or shares when prices are higher. This can help average out cost per share or purchase over time – meaning that even if one investment performs better than another, they’ll balance each other out in the long run.
The history of DCA investing can be traced back to the 1920s when it was first introduced by Benjamin Graham, the father of value investing. Graham recommended that investors divide their investments into equal portions and invest them over time, rather than investing a lump sum all at once. This approach helped reduce the impact of market volatility on investment returns.
Over the years, DCA investing has become a popular investment strategy, especially for long-term investors who are looking to build wealth over time. In recent years, DCA has become increasingly popular in the cryptocurrency market, where market volatility can be extreme. By using DCA, investors can benefit from the long-term potential of cryptocurrency while reducing the impact of short-term market fluctuations on their investment returns.
Why Use DCA in Crypto Investing?
Dollar-cost averaging is a great way to reduce the impact of market volatility. It also reduces the need to time the market, which can be difficult in an environment where information is constantly changing and new developments are happening all the time. By investing a fixed amount of money at regular intervals, investors can avoid buying at the top of the market and selling at the bottom.
You might have heard that DCA works better in bull markets than bear ones, but this isn’t necessarily true – it depends on how much money you’re investing each month and how long it takes before your funds are fully invested (which varies depending on whether or not there’s a dip).
Example of DCA in Crypto Investing
Let’s say you want to invest in Bitcoin, but don’t have $10,000 lying around. You could buy one whole Bitcoin at a time and wait for it to go up before selling it again (and maybe making a profit), but that would take forever, and is quire risky! Instead, let’s use dollar-cost averaging as an example:
Invest $100 every month for 6 months:
In this scenario we’re investing $100 every month for 6 months, so our total investment would be six times as much as if we had just invested all at once.
But since the price per coin fluctuates over time due to market conditions and other factors like news stories about cryptocurrencies or government regulations affecting their value (or lack thereof), this method ensures that each purchase will be made at different prices – which helps average out the price over time.
Disclaimer: This blogpost is for educational purposes only. Zengo does not provide any investment or financial advice whatsoever. As with any financial or investment decision, conduct your own research and due diligence to properly evaluate the benefits and risks of any investment or financial transaction and seek the advice and guidance of qualified financial professionals, in connection with any investment or financial transaction.