Dollar Cost Averaging
Ryan O'Grady,January 8, 2018
The market beguiles many into trading dollars hoping to make it big, and while some do find riches. Many however, caught up in the excitement of the highs and lows either fail to make anything but stressful decisions, or lose their future kids college fund spectacularly!
However if trading on the market still entices you, then consider Dollar Cost Averaging, which spreads your investment over a long window of time as opposed to buying in all at once in a emotionally charged press of the button.
Dollar Cost Averaging is simply the strategy of making regular incremental investments over a period of time (similar to investing into your superannuation fund) as opposed to a one-off lump sum buy in. Each buy in amount can be the same or you can purchase more cryptocurrency when the prices are low and less when prices are high spreading out your investment entry points and risk, and potentially achieve a lower average cost base, which means you purchase a greater number of units for the same (investment) amount.
Dollar Cost Averaging is especially beneficial if you believe the overall market is going up over the long term (12+ months), and/or the market is inconsistent without a clear desirable entry point. So dollar cost averaging can be useful for investors who would otherwise choose not to invest at all or who are unsure about how to determine entry points into a cryptocurrency.
Dollar cost averaging is most effective when the markets are on a downward track but promising a return to a steady long term rise. In a rising (bull) market, the DCA strategy is not as effective as obviously it is optimal for long term gain to buy in when prices are at their lowest – following the fundamental practice of buy low, sell high – BUT even the best psychics are unable to predict when those low days are!
With the DCA strategy you decide on the total amount you wish to invest and divide it into the amount of weeks to buy into; let’s say you have $10,000 to spare then could decide to invest that over:
- $10,000 all at once
- $1,000 per week for 10 weeks
- $500 per week for 20 weeks
Option 1 is high risk as it means if the price dips below the initial purchase price you could be losing money. Option 2 and 3 reduces risk as you are buying-in over a period of time so price reductions will allow you to purchase currencies at a reduced rate. Yes it will take longer and the initial rush of an instant $10,000 buy in isn’t there but the goal is to minimise the risk and make a return on your investment money.
The DCA technique does not guarantee that you won’t have some losses but the secret to successful investing is time in the market, rather than timing the market, and this is how the best investors do it in finance and how you should also be doing it in the cryptocurrency market.
Good luck investing.