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Learning Lab: Investing Strategies – Dollar Cost Averaging

28.12.2022

Do you want to improve your investment actions and make them more efficient and disciplined? Certain investing strategies can help you with this. There are many ways to invest, however, to lessen the impact of volatility and avoid risky lump-sum investing, a good method could be Dollar Cost Averaging (DCA).

 

What Is Dollar Cost Averaging?

Dollar Cost Averaging is a method of spreading out asset purchases and sales by making smaller, regular transactions over a longer period of time.

 

The strength of this investing strategy lies in the fact that it evens out the average price of your purchases or sales, allowing you to better mitigate market volatility. Investing all your capital at once is risky, because the price might oscillate downwards afterwards, creating an even better buy position. You can also apply DCA when you sell an asset. This way, instead of selling all your tokens or coins at the same time, you spread out your transactions in a similar fashion, potentially being able to profit more if the price goes up.

 

Dollar Cost Averaging can prove to be particularly effective during bear markets and recessions. If you choose to commit to this technique, you will invest when the market or an asset is down, which is when buyers may be able to find the best entry points. One of the essential strongpoints of DCA is that it may allow you to benefit from a longer period of time, as opposed to risking investing or selling all your assets at once.

 

 

The Benefits of Dollar Cost Averaging

As an investing strategy, Dollar Cost Averaging has three strong benefits.

 

Adopting this method of investing, you will avoid trading erratically – by investing at regular periods. This doesn’t require huge amounts of money and makes you a more disciplined investor.

 

What’s more, emotions can be put aside while investing, as with Dollar Cost Averaging, you don’t need to make radical decisions in a short period of time. This may provide a certain detachment which can help you see things more clearly.

 

Eventually, by making regular investments, you are able to think long-term, planning for your future and working towards your investment goals.

 

How Does Dollar Cost Averaging Work?

To better understand how Dollar Cost Averaging works, here is an illustrative example.

 

Consider investing $50 per month in a cryptocurrency of your choice – for six consecutive months. Because coin values fluctuate over time, every time you pay $50, you receive a different number of coins.

 

After making equal monthly contributions for six months, your total investment amounts to $300. At the end of the sixth month, you have bought a total of 73 coins, making the investment worth $584 in total. As a result, you would make a profit of $284 over the six months period. The result could have been radically different if you would have invested the whole amount at a certain singular moment.

 

Month

Investment ($)

Coin Price ($)

Coins Purchased (the numbers have been rounded for simplicity and quick understanding)

Coins Total

1

$50

3

17

17

2

$50

5

10

27

3

$50

7

7

34

4

$50

6

8

42

5

$50

2

25

67

6

$50

8

6

73

The Main Idea Behind DCA

DCA is a great investment strategy for many reasons, including but not limited to making investments with a smaller capital, minimizing emotions around investing, and making your money work consistently. Equally important, DCA can potentially better mitigate market volatility, allowing you to benefit from a wider time frame. As you probably already know – nobody can fully avoid risk – in life and in trading as well. Risk is best dealt with by effectively mitigating it.

 

Let us ask you this: Do you have an investment strategy in place for the current bear market? We’d love to hear all about it and get inspired in our Discord and Telegram channels.

Do you want to learn more about crypto, blockchain, and investing strategies like this one? Dive deep into our Learning Lab to become better from multiple angles. To start your DCA investment in crypto today, Sign-Up on the well-established Coinmetro platform or Log-In if you are already a registered user.