What Is Dollar Cost Averaging?
|— Dollar cost averaging is an investment strategy that will literally make you earn “more with less”, especially when you’re working with smaller amounts.
— DCA helps with fighting FOMO and gives you a very easy and lucrative way of fighting the negative effects associated with FOMO’ing.
— It’s easy to learn and doesn’t require much effort from your side, especially if you consider using some automation tool to get the job done.
Dollar Cost Averaging is one of those strategies that you’d want to have up your sleeve when approaching crypto. It’s an easy way to avoid FOMO-ing in and it enables you to safely distribute your budget across a yearly cycle. Whether you’re a big or small investor, DCA will allow you to mitigate the volatility risk of the market.
Forget About FOMO
Let’s face it – everyone FOMO’s but some FOMO more than the rest. In case you don’t understand FOMO, it stands for “Fear of Missing Out” which basically means buying a crypto-asset out of the fear it will break out, causing you to “miss the train”.
This is not a rational strategy. It acts on fear and is “bad-for-business”, bad for your crypto-business. Acting out of fear and investing your budget all at once will only cause you to miss on other opportunities across time.
Instead of acting out of fear, you can opt for DCA and save yourself the pain of regret, especially when you’re working with smaller budgets.
If you’re still struggling with “crypto-slang”, you can check out our article here about “how to speak crypto”.
What Exactly is DCA?
DCA is not crypto-born. It’s an investment strategy that has been around for quite some time and has helped countless people before the crypto-community.
The mechanism of DCA is quite straight-forward – you divide your budget and invest it across a larger time-frame, allocating a small amount from that budget each week or month.
What Happens When You Use DCA?
The most important thing that you need to remember is that you mitigate the risks associated with market volatility by doing so, which safeguards your investments. When you are buying out any asset, not just crypto, you want to minimize the effects volatility could have on your profits. That’s what DCA is doing for you.
So, how does it mitigate the risk? It’s quite simple, basically if you spread out your inputs, you’ll end up buying on days when prices are above average but you will most certainly buy on other days when the prices are average or below average. This way, you’ll average out your inputs, which is the safest overall strategy.
By the way this is only for educational purposes and is not financial advice.
The Pros and Cons of DCA
Now you’ll need to understand what the pros and cons are. This will allow you to draw the optimal conclusions depending on your risk appetite and budget.
1. Risk reduction – it’s obvious that this is one’s top of the list. As mentioned, It mitigates the risk associated with bad investment calls by splitting the budget across a period of time.
2. Lowering costs – buying when the market is low will purchase you more assets, keeping your portfolio profitable.
3. Mitigates bad timing – estimating how the market will perform is Sci-Fi. DCA gives you the edge over bad-buys that occur when you “think you know it’s time to buy”, helping you average losses and wins when in bear and bull markets.
4. Helps manage emotional investment – impulse buys, such as a FOMO-buy, is a habit that most newbies suffer from. You’ll need to break away from it to succeed in the long-run. By using DCA, you will force yourself to steer away from impulse buys.
1. High transaction costs – the fees incurred by these frequent purchases might offset the gains that are accrued by using DCA. Depending on your budget, asset and way of acquiring it, you might end up with very small profits or none at all. Choose wisely.
2. Lower expected returns – with lower risks come lower returns. The overall returns of DCA might not outperform the strategy of a lump-sum investment, but again, market timing is not easy.
3. Monitoring the investment – monitoring DCA investments and comparing margins to a lump-sum investment is somewhat arduous and time-consuming.
Making DCA Easy With Automation
DCA’ing can prove to be somewhat of a burden if you don’t program your inputs you might totally forget or you might find it to be a hassle to keep doing those micro-investments time and time again.
So, why not automate the process?
dcaBTC is a stand-alone web-tool that allows you to easily purchase Bitcoin via eToro and then invest it on the spot with a DCA split of your budget. The tool will simply take your inputs, i.e. how frequently and how much you want to invest, and then auto-manage your investments.
Coinbase, the U.S.-based centralized exchange, has implemented its DCA tool back in 2020 in order to make it easy for its users to maximize their profits. You can opt to use the DCA tool in Coinbase by using your exchange account or creating a new account with Coinbase.
Gemini and Binance
They are both centralized exchanges, like Coinbase. They also decided that introducing DCA and educating their audience on the use of DCA is a good avenue to having their users make more educated and productive financial decisions. Like with Coinbase, you will need an exchange account to use Gemini’s DCA tool.
If you’re on the lookout to add tactics to your crypto-toolkit you should definitely stop by and consider the “Dollar Cost Averaging” aisle. It’s an easy to grasp tool that could help you buy crypto more efficiently in the long run.
Want to know more about crypto? Then check out our School of Block episode, where we explain the basics of money, value and crypto.