Whilst the market is still in its recovery phase, this has provided opportunities for investors to reflect upon their strategic approach to crypto investing. One traditional investing technique, dollar-cost averaging (DCA), has gained traction as a simple yet comprehensive means of wealth building.
In essence, DCA permits the investor to expend a set amount of finance on a regular timescale (day, week, month) to achieve a predetermined target, mitigating the unpredictability of the market and providing further benefits.
This article will examine what dollar-cost averaging is, how it functions, and how you can utilize this strategy to boost your crypto portfolio and earning potential.
What Is Dollar-Cost Averaging?
Let’s start by breaking down the elements of dollar-cost averaging to better understand how the pieces function as a whole.
Dollar-cost averaging is an investment strategy that focuses on dividing expenditure across regular intervals. Systematically investing equal amounts reduces market volatility of the central asset due to the varying cost of the asset. It stands in stark contrast to ‘lump’ and market-timing investments.
Here’s an example of dollar-cost averaging in action.
An investor wants to add more Bitcoin to their portfolio and allocates $1000 for this action. Using the DCA technique, they define their overall outlay ($1000), create a timeframe for which to achieve this (e.g., 12 months), and then divide the expenditure by the interval, ensuring payments are made monthly, regardless of the price of Bitcoin, until the target is satisfied (in this case that’s $83.33 each month).
To provide a real-world example, you could have spent $10 per day on Bitcoin between May 2018 and May 2022, spending a total of $14,600 yet yielding approximately $61,000.
The Benefits of Dollar-Cost Averaging
Aside from the straightforward nature of DCA, this strategy hosts a multitude of other benefits to investors.
For starters, any emotional behaviour related to investing is nullified. You’ve created your strategy and have to stick to it, eliminating any chance of buying or selling your assets when there is a significant price swing.
DCA also minimizes over-analysis of the market and ‘bad timing.’ Simply put, some investors wait and wait for the supposed right time to buy-in. Sometimes that happens before a crash.
In terms of its strategic value, DCA is regarded as a ‘safer’ method of investing, particularly when compared to lump sum purchasing. Yes, the recurring financial input of DCA is of lower risk, but this allows the investor to take advantage of changeable market conditions and can minimize losses in the event of a market downturn.
Finally, if you’re new to investing or have limited capital to place, then DCA will help you gain a foothold in the cryptocurrency market, eliminates a huge upfront cost, and will scale your holdings over time.
Leveraging Dollar-Cost Averaging
By now, you’re probably thinking the DCA is an all-conquering investment technique that’ll slowly but surely see your portfolio realize its potential and ease your minds from the ferocity of the crypto market. However, before you embrace dollar-cost averaging as your new modus operandi, there are a few issues to consider before you begin.
First, you need to create your investment structure – pick the cryptocurrency you favor, allocate how much you want to invest and over what timescale, and run the numbers. Secondly, make sure you’re willing to commit to your goals – this is a long-term project, not a quick fix, so stick to the plan.
To further boost your crypto earning potential, deposit your assets with a cryptocurrency platform that offers users high interest-earning accounts. This will increase the yield on your holdings and create a passive income stream. Singapore-based firm Hodlnaut is one example, offering investors 9.41% APY paid out weekly. Furthermore, crypto platforms can automate payments, ensuring you stick to your schedule.
Despite being a ‘traditional’ investment method, dollar-cost averaging still holds gravitas in today’s cryptocurrency markets. Beyond its simplistic structure and obvious appeal, DCA has substance and strategy, affording investors the chance to establish their portfolios and develop investing confidence.
Whilst there is no superior medium of investing, dollar-cost averaging creates a premise for long-term growth, financial discipline, and stability, presents ample positives for the investors, and protects from the anxiety of an erratic market. An old proverb puts it far more succinctly, ‘it’s not about timing the market, but about time in the market.’