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Dollar-Cost Averaging and Bitcoin Investing

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Bitcoin experiences wild price swings daily and sometimes hourly. Like most investments, volatility causes the fear of missing out, uncertainty, and fear of participating in the crypto market. Price fluctuations make many traders and investors not know the right time to purchase Bitcoin.

Ideally, most traders want to buy low and sell high. But that's not easy, even for experienced traders. So, many traders implement the dollar-cost averaging strategy rather than struggle to time the market. That way, they minimize the effects of market volatility by spending small amounts on this crypto asset.

What Is Dollar-Cost Averaging?

Dollar-cost averaging is a long-term investment strategy where the investor regularly buys Bitcoin in smaller amounts over an extended period, regardless of the price. For instance, somebody can invest $500 in Bitcoin monthly for a year rather than spending the total amount at once.

Depending on the investor's goals, they can change the schedule or duration. While DCA is a relatively popular method for purchasing Bitcoin, it's not unique to this cryptocurrency alone. Even conventional investors use it to invest in the stock market. Some traditional investors use this strategy with their employers' retirement plans.

How DCA Works

The success of a dollar-cost averaging strategy is subject to the Bitcoin market's events. For instance, if you started to invest $100 in this virtual currency every week from 18th December 2017, you may have accumulated $16,300 with a portfolio of about $65,000 on 25th January 2021. That means your investment return would be more than 299%.

On the contrary, some investors consider going all-in as a terrible idea as prices increase. If you invested a similar amount on 18th December 2017, you might have lost almost $8,000 in the first two years. While your portfolio would eventually recover, you will have lost the chance to compound profits. Perhaps, falling prices could have even scared you to sell your Bitcoin and take the loss.

When to Use DCA to Invest in Bitcoin

DCA is an ideal strategy for an investor who wants to enter the crypto market safely. With this approach, you can start by profiting from the long-term price increase while averaging out the risk as the price moves downwards for the short term. Here are more situations when DCA might be a good investment strategy.

  • When thinking Bitcoin price will increase over time: This investment strategy is ideal for an investor that thinks an asset whose value is about to drop but believes it will improve over time. If investors are correct, they will benefit from collecting the cryptocurrency at a lower price and sell when it increases. However, a wrong prediction could leave the investor with losses.
  • Hedging bets via volatility: This strategy exposes an investor to prices all the time. This strategy should average dramatic decreases or increases in the investor's portfolio when the asset experiences price volatility. That way, an investor can benefit from price movements, even if it's a little, regardless of the direction the price takes.
  • Avoiding emotional trading: Since it's a rule-based strategy, DCA enables investors to avoid FOMO. Psychological factors like excitement and fear can dictate a beginner trader's selling and buying decision on a platform like Bitcoin Buyer. Consequently, over-betting due to the fear of missing out or panic selling when the crypto takes a downturn can hinder an investor from managing their portfolio effectively.

DCA is primarily about hedging bets. It helps an investor to mitigate losses while restricting their potential upward growth. It's a potentially safer option for an investor by reducing the possibility of taking severe hits to their portfolio due to short-term price fluctuations.

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