CryptoTrading

Dollar-Cost Averaging Crypto Trading Strategy to Win

4 Mins read
  • How do you do the DCA crypto strategy?
  • How do you get the best dollar cost average?
  • Should I DCA into crypto?

Consider the case where you wish to invest in a cryptocurrency like ETH but are uncertain of the best time. Dollar-cost averaging investment strategies are the most mathematically efficient way to achieve this goal.

Imagine you have 1000 dollars you would like to invest in cryptocurrencies. Rather than supporting the 1000 dollars on one coin at once, you split it into smaller pieces and use them various times.

In this case, you could spend $100 on ten days or $50 on twenty days. In this manner, you indirectly reduce the risk of entering the market at high prices. Nevertheless, you may be less affected by the price fluctuations.

It is an excellent way to schedule purchase orders. Unfortunately, most people incorrectly implement this strategy. To find more about this trading strategy, read on. 

What is dollar-cost averaging in crypto?

The dollar-cost averaging method involves regularly investing a certain amount of money in smaller amounts. As a result of this strategy, you can profit from downturns in the crypto market without putting too much cash at risk at any given time, allowing you to maintain liquidity while still benefiting from market rises.

It is not a new investment strategy. This method of investing has been successful on the stock market for some time. Dollar-cost averaging involves buying from both the market’s highs and lows.

How to trade?

If you invest the same amount of money over time in smaller amounts, you will likely achieve better results than if you invested it all at once. Buying at the wrong time is surprisingly easy, leading to less than ideal results. Furthermore, you can eliminate some biases in your decision-making process. The strategy will make your decisions as soon as you commit to dollar-cost averaging. 

The practice of dollar-cost averaging does not eliminate risk. There is only one goal, to minimize the risk of bad timing by smoothing the entry to the market. There is no guarantee that dollar-cost averaging will lead to successful investment – other factors must also be considered.

Characteristics 

It allows you to invest over time and at a steady rate so that you are not affected dramatically by extraordinarily high or low points, as would be the case if you invested a large sum all at once.

Lower cost

In declining markets, investors earn higher returns when they buy market securities. This strategy allows you to buy more protection than you would have purchased at a high price.

Disciplined saving 

Investors can maximize their returns with dollar-cost averaging and regular deposits into a crypto exchange or investment account. This way can help investors save and invest more efficiently and reliably.

In terms of crypto, there are other benefits, too, but these are the ones that typically stand out. All of these benefits are available to Vauld users through the automated investment programs offered by Vauld.

Prevents bad timing

Many investors, even experienced professionals, are not capable of mastering market timing. It can be risky to invest a lump sum at the wrong time, resulting in a massive decrease in the portfolio’s value. Market swings can be unpredictable; therefore, dollar-cost averaging can smooth out the purchase cost to the investor’s advantage.

Ride out market downturns

With this strategy, investing in declining markets periodically in smaller amounts can help you ride out market downturns. Using it, a portfolio can maintain a healthy balance and increase the portfolio value in the long run.

Manage emotional investing

It is not unusual in behavioral theory to see emotional investing from different factors, such as making a significant lump-sum investment and experiencing loss aversion. Direct capital allocation eliminates or significantly reduces emotional investing.

It helps investors focus on their objectives and eliminates information overflow from various media outlets about the short-term performance and direction of the stock market.

Sample of the DCA trading strategy

With the help of recurring crypto purchases on a cryptocurrency exchange, you can average your dollar cost in cryptocurrency. Investing in crypto is so straightforward with this software that you don’t have to do anything but reap the benefits.

Purchasing $5 weekly in 2020 would earn a person $692, yielding a 160 percent return from a total investment of $275. Let’s explore further bullish and bearish trade setups for this strategy. 

Bullish trade setup

Look at the chart below. If you buy on the first of every month, your average buying position will yield profit in either case if the price goes up or down. 

As you can see, the price went up in October, but it fell afterward. But adding the positions brings the average buying position down. So, when the prices soared in February, the position came in profit. 

BTC dollar-cost averaging chart
BTC dollar-cost averaging chart

Bearish trade setup

In the DCA strategy, it is not recommended to use on the bearish setup. However, you can try, but it has a higher risk than a reward. Have a look at the following setup.

BTC dollar-cost average sell setup
BTC dollar-cost average sell setup

If you keep selling on the first of every month, your average sell price will be lower. But the risk always persists as the crypto’s growth potential is quite high. Moreover, the sell strategy can only be applied to futures trading only.

Final thoughts

As with any investment strategy, dollar-cost averaging has advantages and drawbacks. However, a low-risk strategy may result in lower returns than other strategies.

As a benefit, taking a gradual approach to investing in security can yield a lower dollar-cost average than a lump-sum investment, as long as markets remain depressed. Investors need to include DCA among more aggressive strategies such as target asset allocation, diversification, and regular portfolio rebalancing.

A common practice is for people to brag on social media about their vast profits from one-day bets on speculatively held assets. It is a form of trading that some people enjoy. It seems like an easy way to gain over $100,000 in only a few hours or days by investing in a few hot companies. It seems simple enough at first glance.

A day trader’s goal is to make money consistently, but it’s hard. While it may not be impossible, investing in it is risky. It’s essential to be aware of some risks if you consider day trading for a living.

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