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Whether you are investing in cryptocurrency or other assets, choosing the right investment strategy can be a difficult task. Investing during a bull market is one thing, but trying to bottom out in a bear market can be risky and foolish.
Fortunately, dollar cost averaging (DCA) provides an alternative strategy for those who want to build their portfolio without having to guess what happens next.
In this part of the blog, we’ll explore why dollar cost averaging is a great way to invest in crypto – especially during bear markets – and how it can help you avoid trying to bottom out in a bear market. We’ll also provide some advice on implementing dollar cost averaging into your investment strategy so you can maximize your returns while minimizing risk. So read on if you’re ready to learn more and become a DCA pro!
What is dollar cost averaging?
Dollar cost averaging is an investment strategy used to reduce risk and maximize returns by spreading purchases over a period of time. It allows you to buy a fixed dollar amount of cryptocurrency on a regular basis, regardless of the current price.
By buying an asset regularly instead of investing all your money at once, dollar cost averaging helps minimize the average purchase price per unit, reducing overall risk and allowing for more consistent purchasing power even when crypto and stock prices are low. It also eliminates the need to try to “catch a falling knife” by trying to get the bottom of the market right. Dollar cost averaging is an effective way for investors to accumulate crypto assets in bear markets while taking advantage of reduced prices.
What is an example of dollar cost averaging?
Imagine you are a hypothetical investor who decides to invest $100 per month in Litecoin. If the price of LTC is $50 in the first month, you will buy 2 LTC. If the price is $25 in the second month, you will buy 4 LTC, and if it is $100 in the third month, you will buy 1 LTC, leaving you with a total of 7 LTC at an average price of $42.86 per coin.
If you spent all $300 in the first month, you would only have 6 LTC at an average price of $50. Taking advantage of bear market territory in the second month, the dollar averaging strategy left us in a stronger position.
How do I do a DCA?
Dollar cost averaging is as simple as 1-2-3:
- Select the digital assets you want to buy
- Choose how much you want to buy
- Decide how often you want to buy
Benefits of Dollar Cost Averaging in a Bear Market
Everyone is a genius in a bull market when crypto and stock prices rise, but investing during a bear market is a different story. Dollar cost averaging is a great way to average the price of an asset over time, allowing crypto enthusiasts like those you find in the Coinmama offices to take advantage of the reduced prices you see during a bear market.
By regularly investing a fixed dollar amount, dollar cost averaging helps lower the average purchase price and promotes consistent purchasing power even when prices are low.
This strategy can also provide long-term portfolio building opportunities. For example, dollar cost averaging allows for consistent buying opportunities in a bear market scenario, rather than trying to time the market by picking the exact bottom of a slowing economy perfectly, which as we all know can be difficult and risky . Just because an asset is down 80% doesn’t mean it can’t drop another 80%.
Take Solana (SOL) for example; SOL fell 80% from its record high of ~$260 in November 2021 to below $50 by May 2022. By November 2022 it had fallen another 80% to below $10.
If you had $10,000 to invest and made one purchase of SOL in November 2021, it would have declined by over 95% just 12 months later. If you had invested $1,000 per month instead, your portfolio would have looked MUCH healthier!
“Timing the market is more important than timing the market”
Dollar cost averaging for cryptocurrencies
Whether you’re a stock market expert or a crypto enthusiast, dollar cost averaging can be a smart investment strategy. As a beginner who wants to enter the cryptocurrency market without exceeding their risk tolerance, dollar cost averaging is particularly suitable.
By investing a fixed dollar amount at regular intervals, dollar cost averaging helps spread purchases into smaller, more frequent transactions, reducing potential losses from volatile market fluctuations.
This way, investors can slowly build their portfolio over time without having to guess what will happen next in the crypto market. As a result, dollar cost averaging can help novice investors make more informed decisions while taking advantage of lower prices when bear markets occur.
Managing emotions
Crypto enthusiasts are often emotional characters. A quick look around the Coinmama office is proof of that! Dollar cost averaging eliminates emotional bias from investment decisions by focusing on dollar amounts rather than individual prices.
That way, you can focus on accumulating assets at lower points in bear markets while creating a budget that fits your needs and goals. Dollar cost averaging provides an efficient approach to reducing risk while providing consistent growth opportunities over time, regardless of market conditions.
What are the disadvantages of dollar cost averaging?
One of the potential downsides of dollar cost averaging in cryptocurrency is that due to its strategy of consistent investments over time, it can result in buying more crypto when prices are high and less when prices are low. This means that dollar cost averaging may not be as effective at capitalizing on bear market bottoms as investors hope.
It should also be noted that dollar cost averaging is more appropriate as a long-term strategy rather than trying to capitalize on short-term gains or losses. So if you’re the type of person who just wants to make a quick buck, dollar cost averaging might not be for you.
Dollar cost averaging also requires discipline on the part of the investor, who must commit to sticking with the strategy even if they suffer losses along the way.
Using dollar cost averaging to complement other investment strategies
Using dollar cost averaging in conjunction with other investment strategies can be beneficial to investors as it can help further reduce the risk associated with volatile markets. Spreading investments over time and removing the emotional bias associated with volatile markets are fantastic benefits of the DCA method, but that doesn’t mean you should allocate all of your investment capital to this approach.
One option is to set aside a portion of your funds for dollar cost averaging and use the remainder for a different strategy of your choice.
For example, a hypothetical investor could allocate 50% of their capital in regular crypto purchases (DCA) and keep the balance for a “buy on the dip” fund that can be built over time.
By combining dollar cost averaging with other strategies in this way, you gain exposure to the market with regular purchases while experimenting with other methods. You can then compare the results.
Using the DCA approach along with other investment strategies is an effective way for new investors to enter the cryptocurrency market without taking on too much risk while still having the potential for growth over time.
Variations on the Dollar Cost Averaging Strategy
There are a number of variations of the DCA strategy under different names such as weighted cost dollar averaging, cost value averaging, and enhanced cost dollar averaging (EDCA). These alternative dollar-cost averaging strategies typically require an investor to adjust their investment levels after a period of negative or positive returns — reducing contributions after strong gains and increasing them during downturns. In other words, you buy more when prices are low and less when prices are high. This has been proven to further reduce risk while – in many cases – delivering greater returns.
While this has the potential to push you away from uptrends, historical data shows that missing out during these times is often not detrimental in the grand scheme of things!
Final thoughts
In conclusion, while dollar cost averaging works in many cases for long-term investors, it is important to understand all of its potential drawbacks and limitations before implementing it in your portfolio. Using variations of the DCA strategy, such as EDCA, or combining DCA with other investment strategies may be preferable for you depending on your risk appetite and personal preferences.
As with all personal finance and investment strategies, careful monitoring and tracking will help ensure that your investments are made wisely. Ultimately, dollar cost averaging remains an attractive option for those looking for consistent portfolio growth without the hassle and stress of having to guess what will happen next in the crypto market!
