Dollar-Cost Averaging (DCA)
When it comes to investing, there are many ways and techniques you can follow. Each technique has its own advantages and disadvantages. That is also the reason that one strategy suits you, but not another. Dollar-Cost Averaging (DCA) is also a strategy that you can use if you are going to invest in cryptocurrency. It is seen as a safe way to invest.
What is Dollar Cost Averaging (DCA)?
It is actually not at all difficult to understand what Dollar Cost Averaging. Even if you do not understand investing in cryptocurrencies
, you will soon know exactly what DCA is, whether it is for you, and how you can start with it.
Dollar-Cost Averaging is a strategy that you can adopt when investing in cryptocurrencies. With this strategy, you divide the money you want to invest into different pieces. How often you split it up depends on the number of days, weeks, or months you want to invest. Let's say you want to invest every week for the next 5 weeks.
Opposite of Lump Sum
So, it is the opposite of Lump Sum (LS). Lump-Sum is also one way you could stick with when it comes to investing in cryptocurrency. But even if you want to invest in stocks, you could use a strategy like Lump Sum or Dollar Cost Averaging.
With Lump Sum you would not divide the total company by the number of times you want to invest. As said, you are doing just the opposite. You invest the total company in one go. That means that you invest that 5,000 euros in one go.
Hedging market risks
There are many people who use Dollar Cost Averaging when investing in Bitcoin
. These people have a good reason for that too. Dollar-Cost Averaging is generally a very safe way of investing. The chance that you will make a loss is smaller than if you were to follow the Lump Sum strategy.
That makes sense. Dollar-Cost Averaging limits market risks in a highly volatile market. Bitcoin, for example, is a very volatile market. Bitcoin's value fluctuates tremendously up and down.
By always buying a piece of Bitcoin, you overcome any price drops. As a result, the average purchase value decreases. But of course, it can also turn against you. If the value of Bitcoin were to increase, you will miss the price increases, and the average purchase value of Bitcoin will increase. This can never be said in advance.
Dollar-Cost Averaging, therefore, ensures that you cover the risk of a price drop. The disadvantage is that you could also limit profit as a result. It is not without reason that the greatest profit is made by those who take the most risk. That is also the case in this case.
Playing with Dollar Cost Averaging
However, with Dollar Cost Averaging you don't always have to use the same company. You can also choose to play with the amount you bet. Do you think Bitcoin's value is lower than it should be? Then you can choose to bet a little more money than you normally would. Of course, you create a negative difference for the other moments.
The moment you think that the value of Bitcoin is just a bit too high, you equalize the difference. Then you can choose to invest less money in Bitcoin. After all, the price is higher than it should, so it is better to invest the remaining amount in times when the exchange rate is more favourable.
You can also bet more or less every week. For example, you can start at 100 euros in the first week and increase this amount every week by 20 euros. Of course, the opposite, where you invest a lower amount every week, is also possible. It just depends on what you feel comfortable with. When you do this, the most important thing is that you stand behind the choice you make.
User Situation of Dollar-Cost Averaging
To make it all simpler, it might be good to show a user situation of Dollar-Cost Averaging. This will help you understand Dollar Cost Averaging through a practical example, which you may be able to apply to yourself as well.
Jens is a student with a side job, where he earns 850 euros every month. His ever-growing interest in generating passive income has prompted him to invest in Bitcoin. However, he also has to pay the rent, and he also wants to have some leftovers to be able to undertake fun activities. He also doesn't have time to research the best Bitcoin buying moments.
He has 50 euros left over every month, and after reading this article he decides to start with Dollar Cost Averaging. On the 26th of every month, he invests 50 euros in Bitcoin. After three months, he has therefore invested 150 euros in Bitcoin. This is the value of the rate at which he made his investments:
- January: €6.405
- February: €5.890
- March: €8.495
The average rate at which he made his investment of 150 stands at €6.930. Jens was therefore not bothered by the high Bitcoin price in March. But then again, he could have bought more in February without Dollar Cost Averaging. Yet the risk that Jens has run is a lot smaller due to his approach. Dollar-Cost Averaging has spread the risk over the three months.
Benefits of Dollar-Cost Averaging
You have now read what Dollar Cost Averaging is and in which situations it can be used. Some of the benefits may be clear to you. Below are the main benefits that Dollar Cost Averaging brings.
Reduction of the risk
We already talked about it, but Dollar Cost Averaging ensures that the risk that you take as an investor is reduced. The amount you invest is invested over different price points. That means that the chance that you lose takes is a lot smaller than when you follow the Lump Sum strategy. And of course, it can also be the case that you miss out on a profit.
Lower investment costs
When you invest a large amount in crypto at once, you must have that amount at your disposal. You may have to save first to have an amount at your disposal. That can take a lot of time. And at that time, you might have already been able to make money with your investment. So that's a shame. Dollar-Cost Averaging ensures that you have to incur fewer investment costs when you invest. You can easily start investing 50 euros every week. Maybe you have that amount at your disposal immediately. All these small amounts already earn you money. While you would have to wait until you could have invested a large amount.
Helps against emotionally driven investments
One of the biggest mistakes made by beginners and professionals alike is letting yourself be influenced by emotion. Do you suddenly see that all your girlfriends get into Bitcoin? Or do you read on the news that Bitcoin has broken yet another record? It is very tempting to make the decision to also invest in Bitcoin. But is that a wise choice? You do not base your choice on your own research, but on the feeling that the circumstances evoke in you. It is not surprising that these kinds of mistakes are made. People are simply driven by emotion.
However, Dollar Cost Averaging can help with the mistakes made by emotionally driven investments. If you have agreed with yourself to invest a certain amount every Monday, you do not have to stop yourself from investing a large amount on Friday. It goes against your strategy, and that's why you just don't. The focus is more on weekly or monthly investments. It does not matter what exchange rate the Bitcoin is on.
No more bad timing
We have all experienced regrets about investment because you were too early or too late. Has the price of Bitcoin dropped by 20% a day after your investment? Then you are very fed up. If you had waited a day, you could have bought more Bitcoin for the same price. With Dollar Cost Averaging you no longer suffer from this. Bad timing no longer exists. Because you make an investment at the same time every time, you no longer have to look at the price on the other days. The price no longer determines the moment where you invest.
You are less concerned with the price rate
When you follow Dollar Cost Averaging, you spend less time looking up the price. If you invest based on where the market is, you are constantly looking for the best time to invest. In that case, you want to buy a crypto coin for the best price. That can ultimately take a lot of time. And it can also cause a lot of irritation. With Dollar Cost Averaging you no longer have to worry about this at all. You do not invest based on the price. That's why enough people choose to invest according to Dollar Cost Averaging for this reason.
The Criticism of Dollar-Cost Averaging
However, there is also a lot of resistance to Dollar Cost Averaging. There are enough people who find the disadvantages of Dollar-Cost Averaging outweigh the advantages. We, therefore, find it important to also mention the disadvantages of Dollar-Cost Averaging.
Difficult to keep up with
When you invest according to Dollar Cost Averaging, you want to keep track of whether you have made a profit or a loss for each investment. This means that you have to keep track of the data after many different investment moments. You can also use different programs that do this for you. Still, it is quite difficult to keep track of it all. Ultimately, you will of course also want to have an overview, stating how you did it. In the beginning, such an overview still looks simple, but over time it becomes more and more complicated.
When you make a one-off, large investment, it is much easier to keep track of whether you are making a loss or profit on the investment.
Higher transaction costs
Every transaction you make on the blockchain
must of course be paid. The transactions are validated by miners, and they ultimately want to be rewarded for their work. This way you not only pay with Bitcoin but also with other cryptocurrency transaction costs. The amount of transaction costs varies per currency. The more often you make a transaction, the more often you have to pay for the transaction costs. Do you make two transactions in six months because you follow the Lump Sum strategy? Then you only pay transaction costs twice during that time. However, if you make 20 transactions in the same six months because you invest according to Dollar Cost Averaging, you also have to pay transaction costs 20 times.
The costs you incur for your investments can therefore add up over time. That's why opponents of Dollar-Cost Averaging say it's a shame to pay transaction fees so often. According to them, you could have simply invested these costs in Bitcoin, for example. Then you could even have made a profit with these transaction costs.
You cannot respond to the market
Dollar-Cost Averaging means that you make a certain investment at a fixed time. This moment is not chosen based on the situations in which the market finds itself. In the spring of 2020, Bitcoin fell very hard. At one point, Bitcoin's value had fallen below $ 4,000. Many people thought this was a good time to invest a large amount in Bitcoin. In retrospect, this was an ideal time to make a lot of money. If you are following Dollar Cost Averaging, you could not have invested a large amount at that time. You were stuck with the amount you periodically invest. You can also increase it slightly during that time, but you are still at a limit.
If you had followed the Lump Sum strategy, you could make a large investment in Bitcoin. You were then able to respond to the situation the market was in at that time. More thinking takes place. This does not happen at Dollar Cost Averaging. You invest at a fixed time and you cannot respond to the positive situation of the market.
Ultimately, you can lose a lot of money because of this, especially in the situation of Bitcoin that we have just outlined. For many opponents of Dollar-Cost Averaging, this is the biggest drawback that DCA has.
When should you use Dollar-Cost Averaging?
You may be wondering if Dollar Cost Averaging is for you. When you see something in the benefits, it can certainly help you to invest in the right way. But when should you use Dollar-Cost Averaging? Does it exist for a particular group of people?
If you are just starting to invest in cryptocurrency, and don't know much about it yet, Dollar Cost Averaging would be a strategy that will help you get started in the right way. You then buy smaller amounts of crypto coins, so you can also experiment with different types of coins. But even if you have more experience with cryptocurrencies, Dollar Cost Averaging could be something for you. For example, do you not feel like doing a lot of research into the market? With Dollar Cost Averaging you don't have to spend any time on this at all. It can save you a lot of time when you use Dollar Cost Averaging.
Dollar-Cost Averaging is also perfect for when you don't have a large amount of money available to invest. Do you have a small amount at your disposal every week, month, or quarter? Then Dollar Cost Averaging is a strategy that is made for your wallet.
Use Dollar Cost Averaging on Coinmerce in just 4 steps!
Do you want to start using Dollar Cost Averaging on Coinmerce? It‘s not hard to perform, and we would like to give you information about how you can start easily using DCA at Coinmerce. First, you will need to have an account at Coinmerce, which you can easily create within a few steps.
When you have an account at Coinmerce, follow these next steps to start with Dollar Cost Averaging:
- First, go to the coin you want to buy on Coinmerce.
- Click on ‘Repeating Order‘ in the right table.
- Fill in the interval of the order, time and amount you want to spend for this coin.
- Click on ‘Save Order‘. Coinmerce will buy the coin on the date and time you‘ve set.
If you want to do it the right way, you can also create an Excel sheet where you note everything you do down. Here you write down the date, the cryptocurrency you bought and the price you paid for the coin in a table. Why should you do this? Because this way you keep track of what you do and have a clear overview if this strategy is working for you or not.
That‘s how easy it is to use Dollar Cost Averaging on Coinmerce! By doing it the right way immediately, you will save a lot of time, effort and money to get everything visible.