I used to think/believe that crypto was just a big scam – a way to buy fake money with real money was not appealing to me. But with all the recent news about Bitcoin ETFs, rumors about the U.S. government considering the creation of a strategic Bitcoin reserve, Regulatory Acceptance etc etc, I’ve changed my tune.
Funny thing is how I thought $100 for a Bitcoin was not acceptable, not even $1.000 or $60.000, but reading more about it and analysts’ predictions for the next years, $108.000 (today’s highest) seems cheap now 🙂
With my tail between the legs, I’m dipping my toes into the crypto waters, setting up some DCA bots to slowly give away my real money for something I will never see or touch. It’s exciting and impressive to see how the landscape is evolving, and I’m eager to see where this journey takes me! Better late than never, I guess.
Since I used DCA with stocks and index funds successfully for few years now, I decided to use it with crypto, especially since I have never swum in this lake before.
So what is DCA?
In simple terms, Dollar Cost Averaging (DCA) is an investment strategy where an investor divides the total amount to be invested across periodic purchases of a target asset regardless of the market price. This method/strategy aims to reduce the impact of volatility on the overall purchase by spreading out the investment over time, rather than investing a lump sum all at once.
Why using DCA?
DCA is often compared to market timing strategies. While market timing can yield higher returns if done correctly, it requires significant skill and market knowledge. DCA, on the other hand, is simpler, reduces the risk of poor timing and emotional decision-making.
Again, in simple terms, DCA is used to mitigate the risks associated with market timing and volatility. By investing regularly over a period, investors can average out the cost of their investments, potentially buying more shares or units when prices are low and fewer when prices are high. This strategy is particularly useful for long-term investments and for individuals who may not have the time or expertise to actively manage their investments.
Pros and Cons of Dollar Cost Averaging
Pros:
- Reduces Timing Risk: By spreading investments over time, DCA reduces the risk of investing a large amount of money just before a market downturn.
- Disciplined Saving: DCA encourages a disciplined approach to investing, making it easier to stick to a financial plan.
- Lower Emotional Stress: Regular, smaller investments can help reduce the emotional stress and anxiety associated with trying to time the market.
- Potential Lower Average Cost: Over time, the average cost per share or unit may be lower than if a lump sum were invested at a single point in time.
Cons:
- Missed Opportunities: If the market rises steadily over time, a lump sum investment at the beginning could potentially yield higher returns compared to DCA.
- Higher Transaction Costs: Regular investments may result in higher transaction costs, especially if the brokerage charges fees per trade.
Guess there is too much text, let’s see some examples.
An investor decides to invest $12,000 in Bitcoin using DCA. He/she plans to invest $1,000 at the beginning of each month for a year.
- Month 1: Bitcoin price is $90,000. The investor buys 0.0111 BTC.
- Month 2: Bitcoin price drops to $80,000. The investor buys 0.0125 BTC.
- Month 3: Bitcoin price rises to $100,000. The investor buys 0.01 BTC.
- …
By investing monthly, the investor buys Bitcoin at different prices, which could help manage the volatility inherent in the cryptocurrency market.
Conclusion
Dollar Cost Averaging is an investment strategy that can help manage market volatility and reduce the risk of poor timing decisions. While it has its advantages, such as promoting disciplined saving and reducing emotional stress, it also has some drawbacks, including potentially higher transaction costs and missed opportunities. However, for long-term investors, DCA can be a valuable tool to build wealth over time, whether investing in stocks, crypto, or other assets.
Referral links
If you’re interested in diving into cryptocurrency investments, consider using my referral links from platforms like Binance and Bybit and we will both benefit from it. Both platforms offer attractive referral programs for new users, although Binance is a more straightforward than Bibit, in my opinion.
- Binance https://www.binance.com/en/activity/referral/offers/claim?ref=CPA_00TSS5ZH3W. “When a friend you’ve invited via Referral Mode successfully registers for a Binance account and makes a deposit worth more than 50 USD within 14 days of registration, you’ll both receive a 100 USD equivalent trading fee rebate voucher as a one-time reward“. Additional information about the referral program on Binance: https://www.binance.com/en/support/faq/introduction-to-the-binance-referral-program-d10f95a5ac8847bdb6f422a26921745d
- Bybit https://www.bybit.com/invite?ref=797BB7Q. Sign up for a Bybit account and claim exclusive rewards from the Bybit referral program. There are a lot of rewards that can be earned but it depends on how much you’ll invest. Additional info about the referral program on Bybit: https://www.bybit.com/en/referral/.
Both platforms have very easy ways to setup recurring crypto investments. I’m adding the links below to save you time looking for it 🙂 Either way, if you’d like a post specifically about setting this up on either platform, let me know in the comments.
Binance: What Is Auto-Invest and How to Use It
Bybit: Learn How to DCA Into Crypto With Bybit’s DCA Trading Bots
Happy investing!
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