Introduction

Active trading can be stressful, time-consuming, and still yield poor results. However, there are other options out there. Like many investors, you might be looking for an investment strategy that is less demanding and time-consuming. Or just a more passive investment style. You have many choices in the Binance ecosystem, including staking, lending your assets in Binance Savings, joining the Binance mining pool, and more. 

But what if you want to invest in the markets but don’t really know how to start? More specifically, what would be the optimal way to build a longer-term position? In this article, we’ll discuss an investing strategy known as DCA, or dollar-cost averaging, which provides an easy way to mitigate some of the risks of entering a position.


What is dollar-cost averaging?

Dollar-cost averaging is an investment strategy that aims to reduce the impact of volatility on the purchase of assets. It involves buying equal fiat amounts of the asset at regular intervals.

The premise is that by entering a market like this, the investment may not be as subject to volatility as if it were a lump sum (i.e., a single payment). How so? Well, buying at regular intervals can smooth out the average price. In the long term, such a strategy reduces the negative impact that a bad entry may have on your investment. Let’s see how DCA works and why you might want to consider using it.


Why use dollar-cost averaging?

The main benefit of dollar-cost averaging is that it reduces the risk of making a bet at the wrong time. Market timing is among the hardest things to do when it comes to trading or investing. Often, even if the direction of a trade idea is correct, the timing might be off – which makes the entire trade incorrect. Dollar-cost averaging helps mitigate this risk. 

If you divide your investment up into smaller chunks, you’ll likely have better results than if you were investing the same amount of money in one large chunk. Making a purchase that’s poorly timed is surprisingly easy, and it can lead to less than ideal results. What’s more, you can eliminate some biases from your decision-making. Once you commit to dollar-cost averaging, the strategy will make the decisions for you. 

Dollar-cost averaging, of course, doesn’t completely mitigate risk. The idea is only to smooth the entry into the market so that the risk of bad timing is minimized. Dollar-cost averaging absolutely won’t guarantee a successful investment – other factors must be taken into consideration as well.

As we’ve discussed, timing the market is extremely difficult. Even the biggest trading veterans struggle to accurately read the market at times. As such, if you have dollar-cost averaged into a position, you might also need to consider your exit plan. That is, a trading strategy for getting out of the position.

Now, if you’ve determined a target price (or price range), this can be fairly straightforward. You, again, divide up your investment into equal chunks and start selling them once the market is closing in on the target. This way, you can mitigate the risk of not getting out at the right time. However, this is all completely up to your individual trading system.

Some people adopt a “buy and hold” strategy, where essentially the goal is to never sell, as the purchased assets are expected to continually appreciate over time. Take a look at the performance of the Dow Jones Industrial Average in the last century below. 

 

Performance of the Dow Jones Industrial Average (DJIA) since 1915.


While there are short-term periods of recession, the Dow has been in a continual uptrend. The purpose of a buy and hold strategy is to enter the market and stay in the position long enough so that the timing doesn’t matter.

However, it’s worth keeping in mind that this kind of strategy is usually geared towards the stock market and may not apply to the cryptocurrency markets. Bear in mind that the performance of the Dow is tied to a real-world economy. Other asset classes will perform very differently.


Dollar-cost averaging example

Let’s look at this strategy through an example. Let’s say we’ve got a fixed dollar amount of $10,000, and we think it’s a reasonable bet to invest in Bitcoin. We think that the price will likely range in the current zone, and it’s a favorable place to accumulate and build a position using a DCA strategy.

We could divide the $10,000 up into 100 chunks of $100. Each day, we’re going to buy $100 worth of Bitcoin, no matter what the price. This way, we’re going to spread out our entry to a period of about three months.

Now, let’s demonstrate the flexibility of dollar-cost averaging with a different game plan. Let’s say Bitcoin has just entered a bear market, and we don’t expect a prolonged bull trend for at least another two years. But, we do expect a bull trend eventually, and we’d like to prepare in advance.

Should we use the same strategy? Probably not. This investment portfolio has a much larger time horizon. We’d have to be prepared that this $10,000 will be allocated for this strategy for another few years. So, what should we go for?

We could divide the investment into 100 chunks of $100 again. However, this time, we’re going to buy $100 worth of Bitcoin each week. There are more or less 52 weeks in a year, so the entire strategy will execute over a little less than two years.

This way, we’ll build up a long-term position while the downtrend runs its course. We’re not going to miss the train when the uptrend starts, and we have also mitigated some of the risks of buying in a downtrend.

But keep in mind that this strategy can be risky – we’d be buying in a downtrend after all. For some investors, it could be better to wait until the end of the downtrend is confirmed and start entering then. If they wait it out, the average cost (or share price) will probably be higher, but a lot of the downside risk is mitigated in return.


Dollar-cost averaging calculator

You can find a neat dollar-cost averaging calculator for Bitcoin on dcabtc.com. You can specify the amount, the time horizon, the intervals, and get an idea of how different strategies would have performed over time. You’ll find that in the case of Bitcoin, which is in a sustained uptrend over the long-term, the strategy would have been consistently working quite well.

Below, you can see the performance of your investment if you’ve bought just $10 worth of Bitcoin every week for the last five years. $10 a week doesn’t seem that much, doesn’t it? Well, as of April 2020, you would’ve invested in total about $2600, and your stack of bitcoins would be worth about $20,000.


Performance of buying $10 of BTC every week for the last five years. Source: dcabtc.com



The case against dollar-cost averaging

While dollar-cost averaging can be a lucrative strategy, it does have its skeptics as well. It undoubtedly performs best when the markets experience big swings. This makes sense, as the strategy is designed to mitigate the effects of high volatility on a position.

According to some, however, it’ll actually make investors lose out on gains when the market is performing well. How so? If the market is in a sustained bull trend, the assumption can be made that those who invest earlier will get better results. This way, dollar-cost averaging can have a dampening effect on gains in an uptrend. In this case, lump sum investing may outperform dollar-cost averaging.

Even so, most investors don’t have a large chunk available to invest in one go. However, they may be able to invest small amounts over the long-term – dollar-cost averaging can still be a suitable strategy in this case.


Closing thoughts

Dollar-cost averaging is a redeemed strategy for entering into a position while minimizing the effects of volatility on the investment. It involves dividing up the investment into smaller chunks and buying at regular intervals.

The main benefit of using this strategy is the following. Timing the market is difficult, and those who don’t wish to actively keep track of the markets can still invest this way. 

However, according to some skeptics, dollar-cost averaging can make some investors lose out on gains during bull markets. With that said, losing out on some gains isn’t the end of the world – dollar-cost averaging still can be a convenient investment strategy for many.

Main TakeawaysIn a surging crypto market, it’s essential to stay informed, practice risk management, and do your own research (DYOR) before diving in.Crypto markets are cyclical, and strategic thinking during bull markets can help you prepare for any outcome, whether the current momentum continues or the tide shifts.Managing risk through diversification, avoiding overleveraging, setting stop-loss orders, rebalancing your portfolio, and taking partial profits can help protect your investments in an upward market.It’s an exciting time for the crypto market. With bitcoin setting new all-time highs almost daily, capital flowing in, and investor sentiment in “extreme greed” territory, it feels like the start of something huge. Crypto enthusiasts, investors, and newcomers alike are drawn to the momentum, eager to get a slice of this growing pie.But amid all the excitement, some investors may rush in without fully considering the risks involved. The excitement of a surging market can be exhilarating, and the allure of potential profits can drive investor enthusiasm and fuel further market momentum. Yet, it's crucial to remember that unchecked greed can lead to hasty and ill-informed decisions.To benefit from a bull market safely, it’s essential to stay informed, practice risk management, and DYOR (do your own research) before diving in. Remember, the key to long-term success in the crypto market is not just about riding the highs, but also about being prepared for the lows. Here’s how you can ride the green wave safely and smartly.A Quick Look at Market CyclesCrypto markets, like all financial markets, are cyclical. Right now, we’re seeing incredible upward momentum, and the market feels unstoppable. But if history is any guide, this phase won’t last forever. Markets naturally experience cycles of boom and bust, often triggered by macroeconomic changes, regulatory developments, or shifts in investor sentiment. During the last cycle’s peak in 2021, we saw BTC surpass $60,000, only for the market to undergo a correction that caught many over-leveraged investors off guard. Strategic thinking during bull markets can help you prepare for any outcome, whether the current momentum continues or the tide shifts. In other words, enjoy the green wave – but think long-term.Risk Management: How to Play It Smart in a Bull MarketWith market excitement comes potential risk. Here are several ways to manage your exposure strategically:Diversify Your Portfolio. Crypto portfolios benefit from a balanced approach. While blue-chip tokens like BTC and ETH are staples, consider diversifying into assets with different risk profiles or use cases. Look into stablecoins as a hedge against volatility or explore established altcoins that align with your risk tolerance.Avoid Overleveraging. Bull markets often make leveraging positions tempting, but this can be a slippery slope. Using borrowed funds can amplify gains, but it can also amplify losses, leaving investors vulnerable in a market downturn. Stick to manageable exposure levels, and remember that crypto’s volatility can turn the market upside down quickly.Set Stop-Loss Orders. Stop-loss orders are an essential tool for any investor. By setting stop-loss orders below your entry price, you can limit potential losses while allowing your assets to grow. This way, you don’t have to monitor the market constantly and can protect gains without reacting impulsively.Rebalance Your Portfolio Regularly. As certain assets appreciate faster than others, it’s wise to periodically rebalance your portfolio to keep it aligned with your initial risk tolerance. Rebalancing also allows you to lock in gains and reduce exposure to assets that may have become overvalued.Consider Taking Partial Profits. Taking partial profits along the way can help secure gains without fully exiting a position. This strategy allows you to capture some of your returns while still benefiting if the market continues its upward trajectory.For more tips on managing risk, visit Binance Academy, where you can find comprehensive articles and video courses that can help you navigate the current market safely.DYOR: Don’t Jump In BlindlyWith so much positive market sentiment, countless projects will try to capitalize on the momentum, but not all are created equal. In bull markets, it’s tempting to jump into the latest hyped projects whose tokens seem to be doing well, but these can come with higher risks. DYOR is essential in any market situation, but especially now. Here are some core principles to keep in mind:Research the Team and Technology. Strong projects typically have a credible, transparent team and technology that addresses a real problem. Check team backgrounds, project roadmaps, and partnerships to ensure legitimacy.Assess Tokenomics and Utility. The token’s use case, distribution, and supply can tell you a lot about its potential longevity and value. Projects with weak tokenomics or questionable use cases may struggle in the long term.Understand the Risks. Every project has risks, whether related to its technology, security, or regulatory landscape. Take time to understand these factors, particularly with newer or less established tokens. Up markets can mask underlying issues, but they tend to surface when the market cools.Engage with the Community. Communities often provide valuable insights into a project’s health and direction. Join discussions, read up on community updates, and pay attention to the sentiment of long-time followers. Active, engaged communities often reflect strong project foundations.When faced with an investment opportunity, ask yourself: Would this project appeal to me in a bear market, or am I only interested because the market is on a roll?Final ThoughtsCrypto’s current upward run shows incredible strength, with growing institutional interest, regulatory progress, and a wave of optimism driving prices higher. Bitcoin has led the way, but innovation is thriving across the entire crypto space. It’s a thrilling time for the industry, with the future of financial technology evolving right before our eyes.But remember, caution is key. The crypto market’s volatile nature requires a strategic, well-informed approach, even when the outlook seems overwhelmingly positive. By staying vigilant, doing your own research, and managing risk wisely, you can enjoy the rewards of this green wave while keeping your investments safe.Further ReadingHow to Manage Risk and Trade ResponsiblyDo Your Own Research (DYOR)Responsible Trading on Binance and Our Protection MeasuresDisclaimer: Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance is not liable for any losses you may incur. Not financial advice. For more information, see our Terms of Use, Binance Pay Terms of Use and Risk Warning.