23 May 2022
3 min read
With the pandemic drifting away after a prolonged period, the businesses and incomes are coming back on track, and people are looking forward to resuming their investment goals rapidly. When you see the market, the crypto industry is on a trend, gravitating investors’ interest. However, the account of being a new concept amongst people and beginner investors in maximum parts of the world is a typical mindset of the majority to consider it unstable and/or unreliable.
Comparing the strategies people have been using for a long time in the market, one would fear losing his money in the volatile crypto market as they neglect this domain to invest and are influenced by negative reviews of the numerous amateur investors. One needs a balanced strategy to build his own experience in the crypto investment market with low-risk investment and significant profits. Here, DCA kicks in!
Dollar-cost Averaging (DCA) is a reliable strategy used by market investors for a long time. DCA works by minimizing the risk of investing or purchasing assets along with high price volatility. It focuses on investing a predetermined amount of money at regular intervals regardless of asset price or ups and downs of the market, instead of investing a lump sum amount at once. To analyze the strategy of Dollar-cost Averaging thoroughly, we will walk you through a simple example.
**For example, the initial price is $100 for X cryptocurrency, and you choose to invest $100 every week.
Week 1: $100 per coin & you buy 1 coin. Total invested = $100
Week 2: $50 per coin, you buy 2 coins. Total invested = $200
Week 3: $200 per coin, you buy 0.5 coins. Total invested =$300
At the end of 3rd week, you now own 3.5 coins of X at an average price of $85.71 per coin.**
It is how Dollar-cost Averaging works. By investing the same amount at every pre-decided interval of time, no matter what the market is doing, you will buy more cryptocurrency when the market is low and less when it is high. On average, you will get fair prices and significant overall profit. The fundamental part lies in investing on a fixed schedule which will build you a strong investing position in the near future.
On the contrary, a few groups of investors would argue that the best way to score high gains is to invest a lump sum amount of money at once. It is true, but it does not recognize an individual’s tolerance for risk. Historical statistics clearly highlight that lump sum investments always exceed the return of partial investments, however, that comes at an extensive risk. When markets go up, using your lump-sum investment money to buy crypto and generate profit takes full advantage of market growth. But it is impossible to time the market with accurate precision, especially for the beginners in the market. This strategy would give them a prominent exposure to the crypto market, accompanying a massive risk.
It is too hard to determine the market’s structure at any point in time. It can either be a span of distribution where the asset is about to fall big, or it can be an accumulation span where market giants buy plenty of coins and surge the asset high. No matter which situation the market falls into, it puts the investors at risk. For some, the loss of an investment may be a manageable blow, but for bulk of investors or beginners, such a loss can be a harsh blow to their bread and butter. Dollar-cost Averaging helps you to put your foot in the market without the risk of losing it all. It takes advantage of the market’s natural volatility by lowering the average price you pay for the crypto.
People normally accumulate a lump sum amount and invest when the time is appropriate. It would be great if we could buy a cryptocurrency when the market is low and sell it when it is comparatively high. Regrettably, investors endeavor to ‘time the market’ often has an adverse effect, and they eventually buy and sell with poor timing. Dollar-cost Averaging helps you invest a fixed amount regardless of the market’s fluctuations, aiming to avoid your temptation to time the market, along with shielding your losses in case of sudden market decline.