This is done so as to help mitigate any volatility related issues that may have an effect on one’s overall acquisition. It should be pointed out that purchases have to be facilitated at periodic intervals irrespective of the asset’s price. One of the most advantages of employing this tactic is that it helps users completely get rid of trying to attempt equity buys at the “best prices possible.”
A Closer Look at How Dollar Cost Averaging (DCA) Works
When dealing with dollar cost averaging, users are required to set aside an allotted amount of capital that they may wish to invest along with their chosen investment vehicle — which could be anything ranging from stocks, digital currencies, etc. However, as pointed out earlier, instead of just investing one’s capital in a single go, DCA entails splitting up an investors total amount into a number of smaller equal installments over a specific length of time.
Furthermore, DCA trades can be placed manually, however, using avenues such as 401(k), these trades can be set up in an automated fashion. If the latter is employed, your purchases automatically occur, irrespective of market movements or asset volatility.
From a risk standpoint, users need to understand that when they commit to dollar-cost averaging, they will, at times, be investing when the market is being faced with a high level of turbulence. Conversely, it also means there will likely be times when they end up making large buys during periods of a large scale sell off.
Some Risks Associated with Dollar-Cost Averaging
Most trading platforms charge users a substantial fee each time they facilitate a monetary transaction, and as a result, investor trading costs can soar quite wildly when making use of a dollar-cost averaging strategy. That being said since DCA is primarily a long-term strategy and over stretches of 5-10 years, the impact of this fee can be eliminated to a large degree.
Another massive drawback of DCA is that it can result in users possibly losing out on certain gains that they could have otherwise incurred if they had invested the entire sum of money altogether. However, to incur these big windfall profits, an extreme level of market timing and precision is required, which even many professional traders sometimes fail at.
Lastly, with DCA there is a possibility that users may end up buying an asset after its value has risen sharply only to plunge straight after, resulting in substantial losses. However, when all is said and done, DCA strategies, if used correctly, have the potential to significantly lower one’s risk levels.
Does Dollar Cost Averaging (DCA) Work for Cryptocurrencies?
Within the context of crypto, DCA strategies are somewhat analogous to investors placing an order for a ‘recurring buy’ via a digital asset trading platform. And since digital currencies tend to routinely exhibit a much larger degree of volatility when compared with stocks and other traditional commodities, DCA can help users generate larger profits while mitigating many of the inherent risks involved — even though the rewards may be a bit smaller.
In closing, it should be pointed out that DCA is an excellent strategy for investors across the board, especially newer market entrants since it allows them to deal with the market in a way that doesn’t burn a massive hole in their pockets overnight, something that is a real possibility with crypto trading.