Dollar-Cost Averaging (DCA) Strategy
A trader’s life is filled with interesting events that are dictated by the volatile crypto market. Some players choose instruments with a high level of risk, while others want to minimize the possibility of losing their funds. At the same time, an important component of the crypto routine is the choice of a trading strategy, and today we decided to discuss DCA (dollar-cost averaging).
DCA (Dollar-cost averaging) is a strategy used by investors to smooth out the volatility effect when buying assets. The DCA strategy’s essence is to buy a certain amount of an asset evenly at a regular frequency.
DCA strategy, if done correctly, reduces the trader’s risk if he made a bet at the wrong time. As you know, determining the right time to complete a transaction is an important link in the chain of success, and this is especially evident in such a volatile environment as crypto. By betting on the full amount, an investor can expect a good return, but if he entered the market at the wrong time, he risks losing all his funds. But by dividing its initial amount into equal parts and buying the asset stably over a certain period of time, the average price is smoothed out. Thus, we get a good strategy for trading in the long term.
For this reason, many traders choose DCA as their strategy and avoid unwanted results. It’s worth noting that this strategy structures your actions but doesn’t completely eradicate the risk of losing investments since the market is influenced by other factors that you should pay attention to when trading.
How to create a DCA strategy?
Determining the correct time for a deal is a difficult task, even for professionals. In addition to determining your chosen asset’s average dollar-cost, you also need to take care of your exit plan.
- Determine your price range.
- Divide your investment into equal parts.
- Sell these parts as the market approaches the target.
This short guide will help you avoid losing all your funds by building your trading according to a timing system.
An example of DCA strategy
For example, you want to invest $5000 in BTC. At the beginning of 2018, 0.362 BTC could be purchased for this amount. According to the DCA strategy, you do not buy an asset for the entire amount but divide your investments into equal parts. Let’s say you decide to buy $500 worth of Bitcoin within 10 months. Thus, by the end of the year, you would have acquired 0.61 BTC. Even a novice market player understands that this is much more profitable than a one-time investment.
How to calculate the dollar-cost averaging?
An excellent assistant in this trading strategy is the dcaBTC dollar-cost averaging calculator. Using this tool, you get a visual confirmation or refutation of your predictions. Note that in the case of Bitcoin, which shows a steady uptrend, this strategy shows excellent results.
This graph is proof of an effective strategy for 5 years. Investing in Bitcoin only $10 weekly, the total investment would be $2,600, but in BTC your funds would already be equivalent to $20,000 by 2020.
DCA Strategy VS Skeptics
As with any approach, the dollar-cost averaging strategy has its drawbacks, and many sceptics insist that DCA is ineffective. Of course, this strategy will bring the greatest results with high market volatility. Some are sure that it will deprive the trader of profit in the case of a stable time. But it’s worth noting that often investors don’t have a large amount at once. Therefore, investments in small parts are excellent for long-term investment.