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What is dollar-cost averaging, and how can it help crypto investors?

What is dollar-cost averaging, and how can it help crypto investors?

What is dollar-cost averaging, and how can it help crypto investors?
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By CNBCTV18.com May 24, 2022 6:38 PM IST (Published)

Under DCA, the investor divides the total investment amount and purchases a target asset in intervals. The purchases go on regardless of the asset’s price, and they continue until the investment amount is exhausted.

When is it a good time to enter the market? Whether you are a newcomer or a seasoned investor, you may have asked yourself this question on more than one occasion. There is always the fear of losing money, either by entering right before bears grip the market or exiting before a bull march. This fear is amplified when you are foraying into the cryptocurrency industry. While these digital assets promise high returns, they also come with extreme risk and volatility. So how do you time the market?

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Well, instead of timing the market, you could invest in cryptos periodically with a set amount. This investment strategy is called dollar-cost averaging (DCA), and it focuses on time spent in the market over timing the market.
What is dollar-cost averaging?
Dollar-cost averaging is a tried and tested investment strategy. Under DCA, the investor divides the total investment amount and purchases a target asset in intervals. The purchases go on regardless of the asset’s price, and they continue until the investment amount is exhausted. This can help you minimize the impact of volatility and eliminate the need to gauge the right entry point.
How does dollar-cost averaging work?
Let’s take a simple example to understand how DCA works. Assume you have decided to invest Rs 15,000 in a token priced at Rs 100. At this price, you will end up with 150 tokens. Now, let’s say you decide to spread Rs 15,000 over five months. You invest Rs 3,000 every month, and to your surprise, the price starts falling in the following months. It goes from Rs 100 to Rs 85, Rs 70, Rs 80, Rs 90, and Rs 110. You end up getting more value for your money.
Who should use dollar-cost averaging?
If you are a beginner or least bothered about the technical aspects of the market, go for DCA. And if you are planning to invest for the long-term, even better. Why long-term? Because you would have to stick to an investment schedule and invest a fixed amount regardless of the price. However, if you opt for this strategy, you cannot doubt yourself, and you absolutely cannot get greedy.
Can you apply dollar-cost averaging to the crypto market?
Cryptocurrencies are more volatile than any other asset class. With the market undergoing wild swings almost every month, it is not easy to predict price movements. DCA would help you average out your returns and take advantage of market dips in such cases.
To start DCA, decide the total amount you want to invest, choose the token you want to target, and invest smaller amounts over a specific time. Unless you have signed up with an international exchange, you would most likely have to place the trades manually.
However, note that this strategy works to your advantage when the prices are falling. However, using the DCA investment strategy during a bull run might cause you to lose money.
Another thing to remember is that your transaction fees will also increase with DCA. Therefore, it makes sense to keep an eye on these fees and ensure they are not pulling you back. However, since DCA is a long-term strategy, the fees you pay could get offset by the duration of your investment and its profitability.
Investing using DCA could also, at times, mean that you might miss out on large gains had you invested a lump sum. But then again, windfall profits require technical knowledge, predicting prices, and timing the market correctly, which is not everyone’s cup of tea. From this angle, DCA is a safer way to enter the market.
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