Are you confused about determining the right strategy to do if you want to invest in Crypto? You might be able to try one of the strategies that is very familiar to everyone, namely, Dollar Cost Averaging or DCCA. Dollar Cost Averaging (DCA) is an investment strategy that focuses on discipline and consistency in making purchases. Here is a more in-depth explanation of DCA in the context of crypto investment:
Basic Principles of DCA
1. Regular Investment
You decide to invest $100 every month in a particular cryptocurrency. You choose to make this purchase on the 1st of every month.
2. Purchase at Different Prices
Let's say the price of your chosen cryptocurrency fluctuates every month. Here are the prices and purchases you made over the months:
Month 1: Crypto price = $10. You buy $100 / $10 = 10 units of crypto.
Month 2: Crypto price = $15. You buy $100 / $15 = 6.67 units of crypto.
Month 3: Crypto price = $20. You buy $100 / $20 = 5 units of crypto.
Month 4: Crypto price = $12. You buy $100 / $12 = 8.33 units of crypto.
3. Average Cost
To calculate the average fee per unit of crypto you pay, follow these steps:
Total Investment: $100 (Month 1) + $100 (Month 2) + $100 (Month 3) + $100 (Month 4) = $400.
Total Units Purchased: 10 (Month 1) + 6.67 (Month 2) + 5 (Month 3) + 8.33 (Month 4) = 30 units.
Average cost per unit of crypto = Total Investment / Total Units Purchased
Average cost per unit of crypto = $400 / 30 units = $13.33 per unit.
So, the average price you pay per unit of crypto is $13.33.
Advantages of DCA
Reducing Market Timing Risk
If you try to buy at the lowest price, you may have a hard time predicting the right time. With DCA, you avoid the risk of buying at the highest price point and get a more stable average price.
Example: If you buy all $400 in the first month when the crypto price is $10, you will get 40 units. If the price then goes up to $20 in the third month, you can’t buy more for the same amount. DCA allows you to buy at different prices, helping to even out the costs.
Managing Volatility
Crypto often experiences large price fluctuations. With DCA, you buy at various price points, reducing the impact of volatility.
Example: If the crypto price spikes sharply and then falls, with DCA you have already bought at both the high and low prices, so the impact of extreme price fluctuations will be more evenly distributed.
Discipline and Consistency
DCA encourages you to invest regularly without being affected by short-term price movements.
Example: By setting aside $100 each month to invest, you ensure you stay invested consistently, which can help with long-term investment growth.
Disadvantages of DCA
Potential Delays in Taking Advantage of Low Prices
If the price continues to decline after you start investing, you may buy at a higher price than you would have if you bought at the lowest price.
Example: If crypto prices continue to decline after the first month and you don't make adjustments, you may not fully take advantage of the lower prices.
No Guarantee of Profit
DCA does not guarantee that you will make a profit, especially if crypto prices remain low or fall further after your investment period.
Example: If the crypto price stays below $13.33 (the average cost per unit) for a long period of time, you may incur a loss.
Transaction Fees
If the platform you use charges a transaction fee for each purchase, this fee can increase with the frequency of purchases.
Example: If the transaction fee is $1 per transaction, and you make 4 transactions in a month, the total transaction fee is $4. This reduces the total value of your investment.
DCA Implementation in Crypto
Select Platform
Choose a crypto exchange platform that allows periodic and automated purchases, such as Binance, Coinbase, or another platform that supports this feature.
Determine the Amount and Frequency
Determine the amount of money you want to invest and the frequency. For example, $100 every month.
Purchasing Automation
If the platform supports it, set up automatic purchases on a predetermined schedule. This makes it easier for you to follow the strategy without having to manually make purchases every month.
Monitor and Evaluate
Even though DCA is a long-term strategy, you should still monitor the performance of your investments. Review it regularly to make sure it still fits your goals and risk tolerance.
With DCA, you reduce the investment risk that is concentrated at the time of purchase and try to smooth out your purchase price over time. This helps you to keep investing in a more structured and planned way.