Dollar Cost Averaging
You have seen the financial benefits that investing in cryptocurrencies can provide, and now you want to get in on the action. If it is your first time investing in crypto, and you are not sure of the best investment plan to use with cryptocurrencies, the dollar-cost averaging plan represents the safest plan that minimizes risk and ensures long-term profit.
Dollar-cost averaging is an investment plan that aims to minimize the investor’s loss by breaking a large sum of money into parts that will be invested over a period. An investor can choose to divide $600 into $50 monthly instalments or buy $5 worth of bitcoin per week instead of $275, and the latter would have yielded a 160 percent return, or $417 profit, totalling $692 in 2020. This plan allows you to maintain your liquidity in a turbulent market like cryptocurrencies.
This investing strategy has been around for quite a time, and experienced traders like Warren Buffet have advised using this strategy in volatile markets. The Dollar-Cost Averaging strategy averages out your investments so that you can invest in your preferred cryptocurrency over time without being as influenced by extreme highs or lows as you would if you invested a large quantity all at once. This plan mandates investors to buy their preferred coins consistently, whether they are steady or on a bullish or bearish run.
An investor should be prepared to do their research on crypto markets they want to dive in, with their fixed investment amount and the regular interval that they invest the amount. It represents a safe way to invest in cryptocurrency as an individual just interested in investing in crypto, and willing to get in on the crypto action. Stable coins like Bitcoin and Ethereum are advisable to try this strategy, as they most likely assure you a healthy return on your investment over time.
An example of dollar-cost averaging is Wani; a budding crypto investor taking $100 out of his disposable income monthly to invest in Bitcoin instead of investing $1200 all at once. He will notice that some months he can buy more Bitcoin than other months because of the volatility of the market, he will also notice that over time that he makes a profit despite the volatility. This will, however, only work if he keeps investing in the same coin over time and does not move from one coin to another.
Although you might be tempted, you should not withdraw your immediate profits with this investment plan, you should only constantly buy crypto over a period of time. The Dollar Cost Averaging plan is not necessarily a profit-maximizing investment plan but one that guarantees minimal risk of loss. It requires dedication and commitment over an extended period, but it is beneficial because it does not require the risky method of trying to match the bear and bull moments of the market.
One downside to this plan is that you might not make as much money as you can make if you can correctly guess a bearish market run, but accurately guessing such a volatile market is a near-impossible task for a newcomer. Another catch is that you might buy immediately after a bullish run and you will be buying at a more expensive rate, but this will eventually be smoothed out with time when you buy during bearish markets. The transaction fees charged by crypto exchange platforms may deter you at first, but because this is a long-term strategy, the gains you make will outweigh any transaction expenses. One of the things to cover in your research is the best trading platform to execute your plan.
Dollar-cost averaging is the most practical and convenient technique to ensure that people enter the market with a lower level of risk, especially if they have a longer-term perspective. It is essentially one of the safest investment plans. It is originally a low-risk and low-reward plan, but it can offer a significant payout if done right with crypto. If you want a somewhat secure way to profit from crypto's volatility, a dollar-cost averaging method is worth exploring.
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