Get the weekly summary of crypto market analysis, news, and forecasts! This Week’s Summary The crypto market ends the week at a total market capitalization of $1,165 trillion. Bitcoin is up by over 2% after a rollercoaster of a week. Ethereum decreased by almost 1% over the past seven days. XRP gained more than 15% in value this week. Almost all altcoins are trading in the green, with very few exceptions. The DeFi sector decreased the total value of protocols…
A Beginners Guide on Bitcoin DCA (Dollar-cost Average)
Bitcoin is still the most prominent cryptocurrency, with a market capitalization above $ 850 B. Its value rose in early 2021 to smash the $60,000 mark and even set an all-time high at $69,000. It can compare the recent spike in Bitcoin to the 2017 bull run, where Bitcoin’s price eventually lowered massively. It’s the nature of all cryptocurrencies, but they still provide remarkable opportunities to earn profits.
Financial technology experts are constantly devising investment strategies like the dollar-cost averaging strategy (DCA). Bitcoin dollar-cost averaging enables investors to mitigate the impacts of Bitcoin’s volatility and protect liquidity. However, if you have an appetite for taking risks and are considering Bitcoin, it’s good to understand the DCA investment strategy.
What Is Dollar-Cost Averaging?
If you are a Bitcoin enthusiast who enjoys talking about it often and probably owns some, you may have any questions regarding the digital asset. Many people are still skeptical about cryptocurrencies and are still skeptical about investing in them. Whether they should invest in Bitcoin or if it is the right time to do so is a common question among first-time investors, especially during bull markets.
However, we aren’t all magicians, so we can never know exactly when is the right time to invest in Bitcoin. For that reason, the wise came up with dollar-cost averaging to smooth out volatility and make cryptocurrency investment more straightforward. Dollar-Cost Averaging is a cryptocurrency investment strategy that works for traditional investments.
Bitcoin dollar-cost averaging involves purchasing specific amounts of Bitcoin at regular intervals to reduce the potential negative impact of investing at an inappropriate time. It is more of a long-term accumulation strategy where the investor distributes the desired investment amount into equal portions, then commits equal amounts at regular intervals.
For instance, let’s say you invest $ 6,000 worth of Bitcoin. Instead of committing the lump sum today, you can buy $ 600 worth of Bitcoin every month for the next ten months. According to statistics under dollar-cost averaging, an investor who makes weekly Bitcoin purchases worth $ 5 in 2020 will make $ 692 from a total investment of $ 275.
The investor will make a return of 150% and above. Although it’s not close to the yields recorded in the crypto space, the investor will be protected from investing during Bitcoin’s highs.
Why Use Bitcoin Dollar-Cost Averaging?
Many investors aim to make money from their Bitcoin assets. However, price volatility will most likely be an issue since you can never determine the best time to try your luck.
DCA is a powerful strategy, mainly if you invest in Bitcoin for the long term. It helps you avoid risking all your money and multiple other benefits.
Minimize the Risk of Wrong Timing
The main advantage of using BTC DCA is that it helps you avoid pulling all your investment lump sum at the wrong time, that is, during an ATH. As said earlier, market timing is among the most challenging things investors must do, so having a tool that mitigates the risk is a great idea.
This means you can purchase your Bitcoin periodically, and the price will not always be at its highest. As such, the strategy will smooth your entry by spreading the risk of bad timing and, eventually, will benefit from Bitcoin downturns.
It’s Suitable for Small Investments
Many people fear Bitcoin’s high volatility and will not risk investing large chunks of money upfront. However, dollar coin averaging provides the perfect opportunity to make small investments.
There are no restrictions on the amount of Bitcoin one can purchase, so you could regularly buy $5 worth of Bitcoin. Even if you have a small salary, you can invest a small portion of the amount every month.
You Don’t Have to Track Bitcoin Prices.
Many investors and traders spend much of their time on BTC price charts to see Bitcoin price movements and determine when to buy or sell their holdings. Unfortunately, it is a stressful experience, and anyone can get tempted to act out of emotions.
DCA eliminates the need to keep an eye on the prices since you invest on specific days at regular intervals. Some platforms even allow you to automate your investments by choosing the amount, intervals, and for how long.
Does BTC DCA Have its Downsides?
While dollar-cost averaging is an excellent strategy for cryptocurrency investment, it still has its downsides. First, it allows you to avoid investing only during Bitcoin highs, however, at the same time, you will not benefit from all Bitcoin downturns. Some purchases can even happen during Bitcoin’s ATHs.
Further, it could take longer before you get exposure to Bitcoin. You invest continually but are not actively involved in tracking the coin’s behavior. Therefore, DCA investors cannot entirely benefit from a Bitcoin bull market. The best move would be to make a lump sum purchase at such a time because the price will most likely go higher.
However, dollar-cost averaging will only allow you to buy a small portion, hence smaller earnings during strong bull markets.
In summary, dollar cost averaging is an excellent investment strategy for beginners who understand crypto coins’ behavior. It can also be great for long-term investors and those who find it daunting to track Bitcoin prices 24/7.
The strategy aims to maximize the coin’s downturns and minimize the risk of purchasing during ATHs, hoping that a cryptocurrency value will eventually increase.