What is dollar cost averaging?

What is dollar cost averaging?

What is dollar cost averaging?

Dollar cost averaging is one of the most effective ways to invest in the crypto markets. Investors use dollar cost averaging to put money in the market on a predetermined time frame. For example, investing $200 into Bitcoin on the 1st and 15th of every month. Or investing 15% of every paycheck into Ethereum.

What is DCA? Dollar cost averaging, or DCA for short, is a systematic investing approach that takes the guesswork out of buying an asset. Twice a month (pick your preferred time frame) invest $200 (pick your preferred amount) into XYZ asset. Here’s why this approach works so well for so many people.

    The advantages of dollar cost averaging

    The truth is that nobody knows when and where a market is going to bottom. If you save money waiting for the big crypto crash, you might miss the bottom and your best chance to invest. If it was easy to time the crypto markets we’d all be millionaires by now. Unfortunately, it’s not easy.

    With dollar cost averaging though you don’t have to worry about trying to time the bottom! By investing on a predetermined schedule you automate the process and take luck out of the equation. Ironically, DCA investors are likely to buy the bottom, or close to the bottom, anyways. By investing regularly you’ll end up buying crypto at discounted prices during the bear market.

    A consistent investing schedule

    Whether it’s going to the gym or eating healthy, consistency is important. Investing is the same way. Consistently investing in the markets throughout your life is the most reliable way to grow wealth. There’s a popular saying in the financial community, “it’s not timing the market, but time in the markets that matters.”

    Besides creating a routine investment schedule, the dollar cost averaging strategy has another advantage: it makes buying into a crashing market easier. Many people find it difficult to buy Bitcoin after it drops 70 or 80% from its highs. Unfortunately for timid investors, this is the best time to buy crypto! When sentiment is horrible and it looks like BTC is going to zero, that’s when you need to put your money in.

    Using DCA guarantees that you’ll be buying in no matter how scary the market looks. Discipline is an investor’s best friend. If you find it difficult to buy when the markets are bombing, adopting a dollar cost averaging strategy can ensure you get your money in throughout the market cycle.

    Disadvantages of dollar cost averaging

    While dollar cost averaging can help you to buy near the lows in the market, the strategy also dictates that you’ll end up buying in when markets are overvalued. If you follow the DCA approach perfectly, you’ll buy Bitcoin even when it’s in bubble territory and near a blow-off top. Thankfully, the hybrid approach is a good way to mitigate this unwanted outcome.

    The hybrid approach

    A hybrid dollar cost averaging strategy may be appropriate for people who want to take a more active approach to their investing. There are several ways to tweak the DCA strategy to try and maximize gains.

    • Decrease buying in bubble territory. Historically, once Bitcoin has gone above 3 to 5x its previous all-time high, this has tended to indicate that BTC is in bubble territory. During the previous cycle BTC only reached 3.5x its previous ATH. As Bitcoin makes new all-time highs, an investor could decrease the size of their purchases and put the extra money in cash. Then when Bitcoin crashes, use that saved cash to buy aggressively during the bear market.
    • Buy the dips. Alternatively, an investor might dollar cost average with 75% of their money and put 25% into cash. Instead of waiting for the large crash, however, an investor could use that extra cash to buy every dip. For example, buy Bitcoin every time it’s down 20% or more.

    While a hybrid approach could offer more potential upside, it also requires an active management style. This may work for some people and not for others. Ultimately it’s up to you to figure out what approach works best for your personality. Even a pure dollar cost averaging strategy is infinitely superior to not investing in all.

    Long-term discipline with dollar cost average

    At the end of the day, the biggest advantage of dollar cost averaging is that it forces you to consistently invest in the markets. The longer that you put money in the market, the better your returns will be over the long run. This is especially true for younger investors who have multiple decades to compound their gains.

    How to buy Bitcoin

    You can buy Bitcoin (BTC) and other cryptocurrencies in Exodus, in any way you prefer:

    • Use a credit / debit card, bank account, or Apple Pay. The easiest payment gateway, Ramp or MoonPay, is chosen for you depending on your region and availability.
    • Exchange Ethereum and 200 other cryptocurrencies for Bitcoin (BTC) using the built-in exchange app

    This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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