Crypto trading is a full-time job now, and many traders are now trading every day to be able to churn profits. But what happens when a bear run happens and prices tumble? Surely a lot of traders will lose money when the prices take a plunge. To avoid huge losses and get back on track a lot faster, many traders use a trading strategy known as Dollar Cost Averaging or DCA.
What is Dollar Cost Averaging?
Dollar Cost Averaging is an investment strategy wherein the investor intends to fund a large portion of his capital wealth in short iterations over time rather than all at once. The primary aim behind this concept is to minimise the impact of volatility when investing/purchasing a crypto token. This, in turn, serves the purpose of protecting the liquidity of the investor. In the UK, this process is often referred to as pound cost averaging.
DCA is said to be created to assist offset any negative impact on an invested capital caused by sudden market fluctuations, resulting in huge losses. It also helps you save the effort of trying to time the market to get the best price for the cryptocurrency.
How Dollar Cost Averaging Works?
The entire strategy is based on simple logic. Once an investor determines the total amount they wish to invest, they can decide how to divide them across cryptocurrencies. Once the division is decided, instead of funding at once, the investor can then start purchasing tokens with a part of the total investment. The advantage of committing to this approach means you’ll still be investing in the market even when the asset has dropped in value. This also implies that you will be buying during market downturns. Dollar-cost averaging can potentially help you gain the benefits of buying low and selling high by buying when others are selling.
Disadvantages Of Dollar Cost Averaging
Here are some of the disadvantages posed by the DCA trading strategy:
- The most significant disadvantage of DCA is the probability of missing out on a large gain that you could have managed to earn if you had decided to invest all of your money at once when the market dropped. However, to earn big capital gains, it is necessary to track market timings and invest accordingly. And it is precisely in this moment of a time frame that even experienced traders fail to predict movement patterns of an asset or the market world in general. Hence, it is observed that DCA is a safer way to profit from large market drops.
- Another disadvantage is that you may purchase after a sharp rise in asset prices and then face a price decline. Over time, a DCA strategy typically includes purchasing assets at any stage, whether they are stable, depreciating, or appreciating. A DCA tactic, when used habitually, actually reduces your risk and performs better over a long-term horizon.
- Increased transaction fee tends to be another major drawback. With a dollar-cost averaging strategy, you will accumulate more trading costs due to multiple transactions.
Is DCA Viable For Cryptocurrencies?
- DCA is comparable to purchasing on a cryptocurrency exchange for a recurring buy. Cryptocurrencies can be extremely volatile, often more so than stocks.
- Purchasing at the bottom and attempting to sell at the top can result in possibly higher financial gain. However, the widespread agreement is that DCA is a safer overall investment strategy than lump sum buying and selling. It has a lower risk and reward but still has the potential to profit from market swings.
- With huge swings in the crypto market during its comparatively short presence and its potential for future growth, retaining digital assets has been. It may proceed to be a commercially viable way of investing. A dollar-cost averaging strategy is worth considering if you want a reasonably safe way to make money from cryptocurrency volatility.
Dollar Cost Averaging is a great strategy to mitigate your risks and ensure that your returns are maximised. If done correctly, traders can easily generate profits just by small market movements. If you want to generate consistent returns, you can try out Mudrex. With multiple investment solutions available, you can choose the solutions that match your risk appetite and investment goals.