Dollar-Cost Averaging Trading Strategy in Crypto

2022-05-28, 12:20

Dollar-Cost Averaging Trading strategy is a systematic investment technique that involves buying an asset in a relatively small but planned chunk at a specified interval.

DCA has its origin in the traditional financial market where a practitioner invest in small stock the same amount of dollar each quarter or each month thereby buying more when it is low than when is high and ending with an incredible overall price.

The strong case for DCA is in the way it allows an investor to minimize risk by leveraging market downturn without risking too much capital at any given time.

While DCA removes the pressure of timing in crypto trading and protects against volatility it does not mean an investor adopting it should not read market charts to understand trends and market cycle which are useful when deciding the appropriate exit point.

Crypto trading, like every other form of investment, involves some risks. The risk in cryptocurrencies could be very high owing to the high volatility of the asset traded in the crypto market. No thanks to rug pull and pump and dump tokens that have left several holders with empty digital currencies. There are two significant concerns for those interested in investing in crypto and even the ninjas of crypto trading. One is how to mitigate the volatility risk, and the second is how to get the perfect timing for entry and exit. The timing is incredibly complex as it means running against an algorithm counting in milliseconds.

Managing the two concerns of volatility and timing have not been that easy, especially for those who do not have much background in financial trading. Many trading strategies have therefore been developed and employed to address the concerns. None of these strategies has approximated the desire of prospective investors to mitigate the downside of volatility without having to bother much about timing like the Dollar Cost Averaging Trading Strategy.

Dollar-Cost Averaging Strategy- the Origin

Dollar-Cost Averaging is not a neologism in the financial market. The popularization of crypto trading has made it to be adopted as one of the trading strategies in the crypto market. The concept is traced to Benjamin Graham, who proposed the idea in his book, ‘the Intelligent Investor,” published in 1949. Graham illustrated Dollar Cost Averaging as an investment strategy whereby a practitioner invests the same amount in small stock. This strategy will allow him to buy more shares when the market is low than when it is high while he ends up with an acceptable overall price. DCA is, therefore, a trading technique whereby an investor makes relatively small scheduled purchases of an asset at a regular interval.

Dollar-Cost Averaging in Crypto Trading- The Silver Bullet

The coming of Web 3 has made crypto trading and digital assets the new gold rush. The human tendency and desire to gain all at once is high. People, therefore, fall victim to market volatility by losing it big from lump-sum investments. As a trading strategy, DCA spreads the risk across time and therefore makes it low. It is a gradual investment plan with a long-term time horizon. Rather than buying an enormous amount at a time, in DCA, the investor plans to purchase a smaller amount over a period, thereby standing a chance to average out with a better return. For instance, $10,000 worth of an asset may be split into about $415 monthly for two years or $1,250 every quarter. Some platforms now provide the functionality to automate the scheduled contribution of a DCA investment by connecting an investor’s bank account to an investment account.

Advantages of Dollar-cost Averaging

1. DCA does not require any core market technical analysis skills compared to other strategies.

2.It saves from the pressure of closely watching the market trend to find the proper entry and exit point.

3. It safeguards from the common regrettable outcome of investing too much at a time out of the desire to gain all at once.

4. It enables the holder to take advantage of a market downturn without risking too much capital at any given time.

5. It protects from the downside of volatility.

6. It allows landing potentially profitable assets by buying when others might sell, therefore reaping the benefit of buying low and selling high.

DCA and High Return Trade-off

Since DCA is a risk management approach, it comes with trade-offs. However, the good thing about it is that it leaves you better off. The keyword in the technique is the average. Therefore, it is not a strategy for making the highest possible return. The transaction fees accumulated throughout the gradual purchases are another trade-off that comes with it in crypto trading. It may well not be a big deal if one, however, considers it better to err on the side of caution.

What DCA does not mean

Finding the perfect entry and exit point is not a significant issue in DCA and does not make it a loop. Every investment requires an exit plan. DCA is not an exception in this regard. Basic knowledge of market trends and the market cycle will be needed to be good at the understanding of proper exit points. Therefore, as you consider DCA in your crypto trading, you have to know the exit point adequately. You can refer to gate.io for a better experience of technical charts of various cryptos. It will help you understand market trends, so you know how to exit at an appropriate time.

Author: Gate.io Observer: M. Olatunji
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