Understanding Dollar Cost Averaging

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Understanding Dollar Cost Averaging

Cryptocurrency trading can be very lucrative, but it also often proves to be anxiety-filled and stressful for many beginners. The volatility of leading cryptocurrencies like Bitcoin and Ethereum leaves many new investors wondering what strategy will mitigate the most risk in the ever-growing market. If this sounds like you, we’re here to help.

At Aus Merchant, we help investors of all experience levels learn the cryptocurrency strategies that best fit their needs and risk appetite. To that end, dollar-cost averaging is an ideal starting strategy for newcomers who worry about building a long-term position while enduring downturns in the market. Instead of following price changes on crypto exchanges, you can execute dollar-cost averaging simply by knowing how to buy into the asset of your choice. 

This piece will explain the underlying principles of dollar-cost averaging and how you can start utilising it today. We’ll also outline its strengths and potential weaknesses, so you’ll know what to expect when investing your money. Read on to discover how you could soon invest in cryptocurrency with greater confidence. 

What Is Dollar-Cost Averaging?

The standard advice that a crypto trader will give is to buy an asset when the price is low and to sell again when it’s high. Economically, this makes perfect sense because it results in profit. However, the reality of this type of investing isn’t so simple. Like any asset, Bitcoin prices can be slow to move in any direction, and finding your entry and exit points can require you to spend a lot of time tracking prices on cryptocurrency exchanges. 

Dollar-cost averaging takes a fundamental approach to investing. Instead of trying to time the market and buy a large sum of cryptocurrency at one time, you instead buy a fixed amount at regular intervals. You can choose to make these payments on whatever fixed schedule you feel comfortable with, whether weekly, monthly, or quarterly. 

Why Choose Dollar-Cost Averaging?

Let’s say that you see that the price of Ethereum has dropped to your ideal entry point, and you invest a large amount of money into it, all at once. Changes in the market will have a more significant impact on your investment because of its sheer size. For long-term investing goals, significant losses on a single investment like this can severely stunt growth. 

Dollar-cost averaging mitigates this by using multiple purchases at different average prices. In practice, this minimizes the impact losses have because you bought portions of the asset at different prices. Gains made on assets purchased at a lower price can cover past losses on past investments made at a higher price.

Ultimately, it’s all about mitigating the losses you may experience as a result of “bad timing.” Despite what anyone may tell you, there’s no way to predict the market with one-hundred percent accuracy (though many investors do try). While there are positive signs you can look for in market activity to time your entry, predicting future activity is impossible. By spacing out your overall investment with dollar-cost averaging, gains on later investments can make up for past losses when they experience gains. 

How to Execute Dollar Cost Averaging

As with all forms of investing, you shouldn’t involve yourself in cryptocurrency without having a specific plan. Besides picking the cryptocurrency you want to invest in, you should plan three additional factors before making your first buy: 

  • What price is your entry point?
  • At what price do you want to cash out?
  • How much are you looking to invest overall?

The first two points are a matter of good discipline. There is a tendency among new crypto traders not to have an end goal in mind. When this happens, steady gains convince them to stay in the market without taking profits. By doing so, they risk losing those profits on a sudden dip and either cash out for less profit or remain invested in the asset longer to reach those same heights. Holding firm to your target gives you clear profits when you hit your exit price. 

Once you’ve established the amount you want to invest overall, you have to determine how often you wish to invest the amount you’ll invest each time. For dollar-cost averaging, each portion you invest needs to be the same size. You also want to space out when you make each investment equally. You can also apply this to when you sell as well, selling of equally-sized portions of your crypto at equal intervals, but this can be riskier than selling all at once. 

What Are the Risks of Dollar-Cost Averaging

While amongst the safer strategies out there, dollar cost averaging isn’t without potential flaws. In general, investments that experience the most growth spend the most time in the market. The later investments you make with dollar-cost averaging won’t experience as much change as those before it, and overall you’re likely to experience less growth than if you had invested your money all at one time. The trade-off for mitigating risk is seeing less of a return. 

Another consideration is market trends. When a cryptocurrency is experiencing huge gains, those who recognize the trend and invest sooner stand to profit most. Dollar-cost averaging discourages this because of its potential risk by sticking firm to a schedule.

Aus Merchant Helps You Navigate The Future Of Money

Aus Merchant is a digital currency provider for investors and businesses. Our brokers help you navigate the often complicated and sometimes confusing landscape of digital currency. Whether you want to buy, sell, trade, hold, earn, spend or receive digital assets, Aus Merchant is here to help you realise your goal.

Aus Merchant is a group of industry professionals and investors building efficient trading methods and a simple and easy to use place to store digital assets. Bringing the future financial system to a growing network of Australian investors and businesses. Contact us today to realise your future in digital assets.

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Mitchell Travers

Mitchell Travers

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