With cryptocurrency markets currently in a bearish period, a heavily discussed investment strategy is dollar cost averaging (DCA). For those who are new to investing/trading, a common question might be what exactly is dollar cost averaging and how do I use it for crypto investments? This article will explain what dollar cost averaging is and how you can use it during this bear market.
What is Dollar Cost Averaging for Crypto?
Dollar-Cost Averaging is an investment strategy used in the stock and crypto markets where investors buy an asset or a group of assets at regular intervals, leading to a lower overall cost basis.
Dollar-Cost Averaging takes the emotion out of investing and focuses on putting up a fixed amount of funds over a specified period, regardless of asset prices.
An example of dollar cost averaging for cryptocurrencies might be buying $50-100 worth of cryptocurrency every paycheck you receive (every two weeks), regardless of the current price of Bitcoin, Ethereum, XRP, or any other cryptocurrency.
Keep in mind that dollar cost averaging works over a long period for assets that appreciate in value. DCA does not save you from a declining investment where it is better to simply cut your losses.
With Bitcoin, Ethereum, XRP and other cryptocurrencies outperforming all other assets in the last five years, dollar cost averaging is advantageous for cryptocurrency investments. It is much safer than putting your life savings into crypto all at once, as you may end up timing the entry position wrong.
Did you know that 401k plans use dollar cost averaging for their investments? Since taxpayers set a certain amount of funds from their salary to contribute each month, everyone uses DCA to achieve a lower cost basis for appreciating assets.
How to Use Dollar Cost Averaging in Crypto?
As mentioned above, the best way to use the dollar cost averaging investment strategy for crypto markets is to set aside a certain amount of funds every two weeks to 1 month and invest it in any of the top 5 or 10 cryptocurrencies.
The best part of this investment strategy is that you won’t be so concerned about the short-term price volatility of Bitcoin and other cryptocurrencies. With the way the crypto markets usually move, it is a long and painful months of downtrend followed by significant price growth in a short period. Your lower overall cost basis and lack of emotional attachment to your investment will make it easier to stay in the bear market.
Those who believe that Bitcoin is king should stick to BTC. Those who believe in NFTs and smart contracts might stick to Ethereum, BNB, or Solana. Those who believe in the future of DeFi, Yield Farming, and Stablecoins could look to Avalanche or Terra Luna.
Any of the top 10 cryptocurrencies has tremendous long-term potential and is likely to continue its price growth. The $100k BTC has yet to be reached, and the market is still far from its peak.
While this year has been a rough one for cryptocurrencies, significant price growth could be seen over the next 3-5 years by exercising the DCA investment strategy.
Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency.
Follow us on twitter @elsoldado_vr to stay up to date with the latest Metaverse news!
Image Source: Vector Tone/123RF