The R Roundup Presents: DOLLAR-COST AVERAGING 101 FOR DUMMIES #6
Following on from the success of the gallery event, we are pleased to announce that we are back doing the thing we love the most: providing educational content that can aid all of our readers to gain a deeper understanding of the crypto economy.
Many people get caught up in finding an investment strategy that works for them instead of creating a systematic process to tackle the markets, leading them to chuck capital at things and expose their capital to more downside than necessary.
Today in article #6 we will be covering the all-important DCA (dollar-cost average) strategy.
What Exactly Does DCA Mean Russian DeFi? 🤷
For anyone reading this article, this might be your first question as investing/trading jargon can be quite technical; however, essentially dollar-cost averaging is splitting your capital into equal sums and buying a said asset in regular even increments. You aim to split up your investment across a period making re-occurring investments almost as a hedge against the volatility.
Benjamin Graham, a British born, American economist first recognised the term DCA in his book “The Intelligent Investor” which gave the following textbook definition of dollar-cost averaging:
“Investing a set dollar amount in the same investment at fixed intervals over time”
The consistent theme here through the many different ways to describe DCA is the fact that you are dividing your capital into smaller increments which can then be deployed more frequently than a lump-sum investment.
What Do I Avoid By Dollar-Cost Averaging?⚠️
As previously stated the strategy can be seen as a way to hedge against the volatility of the crypto markets.
When dollar-cost averaging you are reducing the risk of buying a coin with a big chunk of capital and then the markets dumping 40% the next day.
Putting it into perspective, let's say on the 22nd of March you bought $1000 worth of $BTC. In 26 days you would've lost 18% of your initial investment as $BTC continued to make lower lows. You can easily see how to lump-sum capital can result in you being unintentionally over-exposed and lead to all the negative psychological aspects of investing such as marrying your bags.
Unlike any other market, the possibility of our precious coins dumping is higher than a $TSLA stock dumping therefore adopting strategies to counter-act that will more often than not work in your favour.
When Do You Use This Strategy?⏳
Now as we all know, investment strategies are very personal and depend on too many subjective variables to try and draw conclusive answers however through my personal experience, the DCA strategy can be applied in all different investment circumstances.
Whether you are looking long, mid or short term, that doesn't change the way you DCA and it also doesn’t change the benefits the strategy can reap you.
I’ve tended to use dollar-cost averaging when there is a high conviction project for me that I have either had on my radar for some time or do not want to miss out on that I will allocate some capital too, then divide it by how often I will be buying and then proceed from there.
DCA doesn’t mean you absolutely neutralise the aspect of volatility however if you keep having cheaper entries, you have a chance of bringing your average buy price right down despite if you have made some buys higher. Which is the overall aim of this strategy.
To put how DCA works into perspective I thought it would be good to draw an example of how it should work.
Person A: Wants to invest $1000 into $AZERO while the price is $2.80 and they buy 354 tokens at that price for $1000. If price pumps, they are in a great position as they bought 354 tokens and when it smashes past ATH they will be happy. However, if we go down, they won’t have any capital left to do something about it and essentially are stuck in a loss until we break even at $2.80.
Person B: Wants to invest $1000 into $AZERO through spreading their $1000 into $200 increments and they will buy for 5 days, starting at $2.80 on day 1 with $200. If price pumps, they would’ve made money. If the price went down to let's say $2.40, whilst their $200 is in a loss (nowhere near as much as person A) they will have the ability to buy another $200 at $2.40 giving person B an average of $2.60 despite buying at $2.80. They also have $600 left to continue bringing that average down.
As you can see from the examples, dollar cost averaging allows you to be much more flexible with the markets and it makes sure that you don’t allow yourself to only be open to the upside potential.
The markets have many players now who do not want the little guys to win and the institutions aren't coming, they are here already. The market is manipulated to levels beyond belief and the only way to counteract that is through adopting a strategy that works for you and sticking to it.
Strategy beats emotion and when you find yourself falling into an emotional trap while investing, it is the strategy that will bring conviction.
As a reminder this is not a trading signal, it is an opinion and each trader/investor should know and understand the risks attached to trading. At no point should this be regarded as financial advice
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