Beginner Guide: Understand DCA Strategy in Crypto Trading

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By Tokenize Xchange
April 04, 2022

Buy low, sell high is a principle philosophy of all crypto investors, but have you ever heard of DCA (Dollar-Cost Averaging)? In this article, Tokenize Xchange will introduce you to a common investment strategy in cryptocurrency: Dollar-Cost Averaging strategy. Let’s take a look! 

DCA strategy
What is DCA strategy?

1. What is DCA?

DCA strategy is a method in which an investor invests a large sum of money in modest increments over time rather than all at once. The idea is to profit from market downturns without putting too much money at risk at any given time.

DCA is intended to help counteract the negative impact of short-term market volatility on an investment. If the price of an asset falls during the time you are dollar-cost averaging, you will profit if the price rises again. DCA can save you the time and effort of trying to time the market to get the best stock prices if you’re not a professional market watcher. It’s a method for investing slowly and regularly, with the goal of avoiding the human need to obtain everything at once.

2. Understand DCA strategy

When you commit to Dollar-Cost Averaging, you’ll be investing when the market or a specific asset has fallen in value. It also suggests you’ll probably be buying during a market sell-off when a large number of assets are sold in a short period of time. During bad markets, some investors may be hesitant to buy equities (markets experiencing price declines).

DCA strategy
 Understand DCA strategy

However, buying when the market is down can provide you with the opportunity to acquire potentially successful assets at extremely low prices, which may or may not be the same as those in your DCA strategy. Dollar-cost averaging can help you reap the rewards of purchasing low and selling high by buying when others are likely to sell.

Let’s look at the example below to understand better: 

In February 2022, Joe bought 1,000 ADA (Cardano) at $1. The next month, ADA price dropped to $0.5, Joe decided to buy 2,000 ADA at $0.5 so he can reduce his average buying price. The total number of ADA he is holding is 3,000. What is the average buy of Joe?

Formula: Total Cost ÷ Total ADA = Average Buy

Average buy = (1000 x $1 + 2000 x $0,5 ) : 3000 = 0,66$

To sum up, by using DCA strategy, Joe reduced his average buy of ADA from $1 to $0.66. 

3. Benefit and disadvantages of DCA strategy 

dollar-cost averaging
Benefits of dollar-cost averaging

Benefit

Lower your investment risk 

The dollar-cost averaging investor does not need to be concerned about a dramatic market decline. In fact, it may be encouraged because buy orders will be more lucrative during a correction.

Reduce emotional factors 

During bear markets, it’s easy to get caught up in FUD, and during bull markets, it’s simple to get wrapped up in FOMO (especially with all the great crypto memes out there). However, DCA is more of a “set it and forget it” method for filtering out market noise. Timing in marketing also becomes a non-issue.

Prevent bad timing

If you put all of your money into one investment at once, you run the danger of investing right before a major market drop. Consider what might have happened if you had made an investment right before the market crash of 2007. You would have lost more money if you had simply invested a portion of your money prior to the downturn.

dollar-cost average strategy
Dollar-cost average strategy

Disadvantages

Market Value Increases Over Time

The fact that the market tends to rise over time is a drawback of dollar-cost averaging. This indicates that investing a large sum of money up front will likely outperform investing lesser amounts over time. Because of the market’s upward trend, the lump sum will deliver a superior long-term return.

It Isn’t a Replacement for Identifying Good Investments

However, dollar-cost averaging isn’t a panacea for all investing dangers. Even if you choose a passive dollar-cost averaging strategy, you will still need to find solid investments and conduct research. You will be investing steadily into a losing investment if the investment you identify turns out to be a lousy one.

4. How to use DCA feature at Tokenize Xchange

You have understood clearly about DCA, so, how does DCA work on Tokenize Exchange?

DCA feature allows you to automatically make purchases periodically (daily, weekly, monthly).

For example, you choose the monthly option. Next, you will be able to choose which day of the month you want to buy. For instance, 1st day every month. Then, you’ll choose the time, eg, 6 pm.

Then, at 6:00 PM 1st monthly, it will auto-buy at whatever price (Auto place makes order).

For the weekly option, it will process the same way, you must choose the date and time. Then on the exact time & date, it will execute the order.

Bottom line

Dollar-cost averaging could be a suitable option if you are a less experienced investor who wants to follow a predetermined strategy to avoid being exposed to wild market swings. If you’re an experienced investor, however, you might be able to earn greater results by actively strategizing rather than relying on DCA strategy. Stay tuned for new articles and interesting crypto knowledge at Tokenize Blog!  

Disclaimer

All content produced by Tokenize Exchange is intended solely for educational purposes. This should not be taken as financial or investment advice. Individuals are advised to perform due diligence before purchasing any crypto as they are subject to high volatility.