The investment strategy plays an extremely important role, used by many investors to limit risks.
DCA is known as a popular dollar-cost averaging strategy in crypto investing specifically and financial markets in general.
So what is DCA?
How to apply DCA to buy crypto?
Together with Trà Đạo Crypto, let’s explore in detail the dollar-cost averaging (DCA) strategy through the article below.
What is DCA?
What is DCA? DCA stands for Dollar Cost Averaging, which is the average price strategy in investing, helping to minimize risks and effectively increase the number of coins purchased.
Apply the DCA strategy by splitting the number of purchases at different price levels. The total price of the averaged purchases will yield the best common price.
Note that you should only average down, not average up. Always keep 10% to 20% of Stablecoin to hedge against deep price drops.
For example: You have $10,000 and want to buy ETH at $2000 each. Instead of buying 5 ETH at once, apply DCA as follows:
Round 1: Buy 2 ETH at $2000 each, leaving $6000.
Round 2: Wait for the price to drop to $1500, you continue to buy 2 ETH, leaving $3000.
Round 3: Wait for the price to drop to $1000, you continue to buy 3 ETH, completing the purchase process.
Thus, with the same investment amount, instead of just owning 5 ETH at an average price of $2000. After applying the dollar-cost averaging (DCA) strategy, you now own 7 ETH at an average price of about $1428.
See more: 🔗 How much money is needed to play Bitcoin? How to invest in Bitcoin in Vietnam.
Why should DCA be applied?
1. DCA helps reduce emotional investing
When investing in crypto, maintaining a strong mindset and not getting caught up in the emotional ups and downs throughout the investment process is extremely important.
DCA is a strategy that helps invest with planning and discipline, eliminating the situation of 'buying at the top'.
Maximize the limitation of emotional investment decisions or psychological influences when experiencing FOMO. This is a mistake that most new crypto investors encounter.
2. DCA helps optimize investment costs
The crypto market fluctuates continuously and it is not easy to predict whether buying at the current price has 'hit the bottom' or not.
The DCA strategy helps you always buy the lowest possible price of the coin.
By applying DCA, in addition to having a good position, you will not need to put too much money into one investment; the amount has been divided and spread over a predetermined period.
3. DCA simplifies the investment process
No need for complex analysis, no time wasted trying to find bottoms or predict tops like other methods.
DCA is a simple yet scientific and highly effective investment strategy. It’s easy to apply even for newcomers to cryptocurrency trading.
However, there are many ways to apply the DCA strategy, below are 2 common ways to apply DCA in crypto investing.
The dollar-cost averaging (DCA) strategy in crypto investing
Strategy 1: Periodic DCA
Periodic DCA means you will invest according to a predetermined time frame, regardless of whether the value rises or falls. This strategy requires a stable mindset and reasonable capital; otherwise, you may run out of funds midway.
In return, you will be very relaxed and not need to care about whether the price goes up or down, which requires you to have absolute trust in that coin and the previous roadmap.
The process of applying DCA periodically is as follows:
Step 1: Find and select potential coins.
Step 2: Choose the investment frequency: it can be annually, monthly, or daily.
Step 3: Determine the amount to invest based on the frequency mentioned above.
Step 4: Discipline and consistently invest according to the plan.
Step 5: Calculate the average price of the invested amount compared to the current price.
Step 6: Evaluate the effectiveness.
Strategy 2: DCA at the right time
Also known as the flexible DCA strategy.
Instead of continuously investing periodically without observation, this strategy requires analysis of price fluctuations and market news sensitivity to determine the appropriate buying time.
For example: News about Bitcoin ETF is 'very hot' at the moment, if you predict Bitcoin's price will rise, this is a great time to 'gather assets' before the price potentially increases.
Limitations of the dollar-cost averaging (DCA) strategy
Although the dollar-cost averaging (DCA) strategy provides many advantages, it also comes with limitations:
Select reputable coins to avoid losing everything if that coin disappears.
You must be a hardcore Hodler, holding for a long time to optimize the cost spent to hold the most coins.
Low profits, because the nature of the DCA strategy is to minimize losses.
Instead of making one purchase, you have to make multiple purchases, leading to additional time and transaction fees.
Therefore, before applying the DCA strategy, you need to clearly define your investment intentions. Refer to the article: What is holding coin, trading coin? How to play coin for beginners.
Conclusion
Through this article, Trà Đạo Crypto has introduced you to the dollar-cost averaging strategy (DCA). The main purpose of this strategy is to help you break down your funds, thereby minimizing investment risks.
Note that you should only apply DCA when you really trust that coin. Because DCA will be an optimal strategy if you choose a long-term investment style.
What is DCA? Do you really understand how to apply it? Please leave a comment below or join the Trà Đạo Crypto community to discuss together.
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