Often we have come across the word DCA in crypto: What is it? Do you know?
When it comes to lending, there are plenty of options, whether it’s fiat currency or cryptocurrency, and with varying types of risks. And one such strategy of investing is DCA, also known as Dollar-cost averaging, designed to build wealth for the future. It is an investment type where periodic capital purchases eventually eliminate the requirement for timing markets.
A bit confusing, right!? For understanding in detail, continue reading the article to know more about DCA in crypto: what is it?
DCA In Crypto: What Is It?
DCA (Dollar-Cost averaging) is an estimated investment plan that assists investors in eliminating any emotion-based decision.
Here, the lender looks to diminish the effect of price volatility by escalating purchases across predefined intervals. Instead of laying out a lump sum amount in a capita; class, the lender chooses to invest a fixed amount of money weekly, monthly, or bimonthly. This is accomplished regardless of any changes in the value.
Understand Dollar-cost average as a feasible means of navigating a volatile currency market without measuring the best entry point. Because the asset is spread across the predefined intervals, the planning tends to make your purchase prices over the investment time. And come to think of it, it is much better than investing a lump sum at a peak price.
So, we can say that DCA is a suitable investment plan for all newcomers or individuals who do not wish to overburden themselves with any technical aspect of crypto market analysis.
How Dollar-Cost Averaging (DCA) Works?
Before explaining any technicalities, let’s understand all the possible outcomes of a lump sum investment strategy. For instance- let’s say that you are investing a lump sum of $1,000 in the capital worth $50 per share. So, you can purchase 20 shares in one purchase.
So, if you sell the crypto when its value is at $40,$60, or $80- your profit will be -$200, $200, and $600.
So, now it’s clear that lump sum investing works best when the investor can identify the best time to enter the market- this also means that you have to choose the right time to sell.
Is DCA Good For Crypto Investing?
Up till now, you must have noticed that the dollar-cost averaging investment method is best for any volatile investment class.
And the DCA in crypto becomes more crucial. This is because cryptocurrency is synonymous with volatility, and it is not easy to predict the event of price movement.
This is why you might have to adopt a DCA strategy to uniform the purchase value and take advantage of market losses. However, it is still important to know that you should not suffer significant losses during a bull Cycle.
So we can say that the DCA investing method is more potent for the value of the digital currency that is experiencing a decline in the market because it moves your average purchase price of BTC down with every repeating purchase of Bitcoin.
How To Use DCA As A Crypto Investment Strategy?
To use dollar-cost averaging as a crypto-investment method, you need to opt for a brokerage service that will offer periodic purchase options.
The majority of the top trading platforms like Binance, Coinbase, Crypto.com, and many more offer recurring purchase features. You can set the purchase frequency and amount and let your trading platform handle the rest.
But, if the recurring purchase feature is not available in your area, you can set up the purchase plan manually by selecting a fixed amount to invest at predefined intervals. This would require more effort from your end instead of the set-and-forget method.
Pros Of DCA
It is benign to say that DCA Investing In Cryptocurrency increases the profitability of investment amounts by taking benefits of price dips. Some other advantages of DCA investing are-
- It will avoid risks arising from the untimely nature of the Crypto Market Cap.
- It will eliminate emotion-based investment decisions.
- It is best for those who are looking for long-term investment.
Cons Of DCA
The one pronounced disadvantage is the increment in the transaction fees. And since this strategy has multiple purchases, the exchange cost may increase, especially when using a crypto- brokerage service for fiat-to-crypto currency exchange.
There will also be potential losses due to consistent surges in the asset price—the higher the investing price, the lower the impact of DCA as an investment strategy.