The Right Time to Invest in Crypto Using DCA

Bitcoin and other cryptocurrencies are notorious for having daily (or even hourly) price volatility. Like any sort of investment, volatility may cause anxiety, FOMO (fear of missing out), or even a general dread of involvement. How do you choose the best time to purchase while prices are fluctuating?

In a perfect environment, buying low and selling high is simple. This is actually easier said than done, even for experts. By consistently investing a smaller amount into an asset (such as stocks, gold, or cryptocurrencies) rather than attempting to "time the market," dollar-cost averaging, often known as "DCA," is a technique used by many investors to mitigate the impacts of market volatility.

DCA could be the ideal choice when a person thinks their assets will increase in value over the long term but will experience price volatility along the way.

What is DCA?

Regardless of price, an investor frequently acquires smaller quantities of an asset over time when using the DCA technique (for example, investing $100 in Bitcoin monthly for a year rather than $1,200 all at once). Their DCA programme may change over time and last for a short while or a long time, depending on their objectives.

Even while DCA is a popular way to buy Bitcoin, traditional investors have used this strategy for decades to deal with stock market volatility. You could already be utilising DCA if you routinely invest via your employer's retirement plan.

What are the Benefits of DCA?

Without the famously tough task of timing the market or the danger of unintentionally squandering all of your money to invest "a lump sum" at the top, DCA can be a useful approach to owning cryptocurrency.

No matter how pricey the purchase is, the objective is to consistently make affordable investments. As a result, the price of purchases may "average" out over time, reducing the overall impact of a dramatic drop in costs on any given purchase. And even if prices do fall, DCA investors may still make their planned purchases with the possibility to make money if prices go up.

When is DCA More Effective Than Lump-Sum Investing?

With the help of DCA, an investor may enter a market risk-free, start making money from long-term price increases, and offset the risk of temporary price falls. And compared to making a sizable investment all at once, it could offer more predictable income in situations like the ones indicated below:

1. Buying an Asset That May Increase in Value Over Time 

If an investor thinks prices are about to fall but will eventually rise again, they can use DCA to invest during the period they anticipate a downward swing. They'll benefit if they're correct since they'll be able to buy assets for less money. Even yet, they will still have market investments as the price increases even if they are erroneous.

2. Hedging Bets Through Volatility

Investors are exposed to prices over time through DCA. This strategy tries to moderately profit from price movement in both directions while attempting to balance out any abrupt increases or decreases in portfolio value during times of market volatility.

3. Avoiding FOMO and Emotional Trading

DCA is a method of investing that is based on rules. Beginner traders sometimes fall victim to "emotional trading," in which decisions about whether to purchase and sell are influenced by emotions like fear or enthusiasm. Investors may handle their investments ineffectively as a result of these (think: panic selling during a downturn or overbetting due to fear of missing out on exponential growth).

How Does DCA Work in Practice?

Any DCA strategy's success is, of course, still dependent on market conditions. Let's examine a real-world price example to illustrate this as Bitcoin was about to see its greatest decline to date. Starting on December 18, 2017 (around the price peak of that year), you might have invested $100 in bitcoin each week for a total of $16,300. However, your portfolio would be worth almost $65,000 on January 25, 2021, representing a return on investment of more than 299%.

Going "all in" while prices are peaking, however, is typically regarded as a bad idea – but how could you know? On December 18, 2017, if you had invested the same $16,300 in its whole, you would have lost approximately $8,000 in the first two years. You would have missed the opportunity to multiply your profits in the interim, even though your portfolio will rebound (and maybe even scared yourself into selling your bitcoin at a loss).

Say you waited a year and made a $200 monthly bitcoin investment from December 2018 to December 2020. In this scenario, as opposed to $23,000 from lump-sum investing, your portfolio would have a total value of slightly over $13,000 in 2020. You would have made more money from an "all-in" investment, but it would have been riskier because any large price changes after the date of your initial investment would have had an impact on the entire investment.

Hedging your bets is the main goal of dollar-cost averaging; it limits your upside potential in an effort to reduce prospective losses. It attempts to lessen your risks of suffering major losses to your portfolio due to short-term market volatility, making it a potentially safer option for investors.

Even after gaining such extensive knowledge about DCA, it's crucial to consider your particular investment conditions in order to determine whether it is the best plan for you. It is always advisable to seek advice from a financial expert before beginning a new investment strategy to maximise returns and minimise losses.

Written By: Devika Mishra

Edited By: Nidhi Jha