Cryptocurrency investment is an interesting game. The price volatility is what attracts traders and investors alike. Millionaires have been made overnight thanks to crypto, but the opposite is also true. Many people have lost a lot of money investing in cryptocurrency. That’s why dollar cost averaging is so important.
What is dollar cost averaging?
It is an investment process that is used to average your investment price to manage risk and exposure to the market. By investing using dollar cost averaging, you are less reliant on your ability to time the market. Instead, you are building a long term position by buying in over time. Here’s how it works.
Dollar cost averaging is the process of buying an asset consistently. For example, if you wanted to invest $1,000 in Bitcoin, you could average this buy over 10 weeks and buy $100 worth of Bitcoin every Monday, instead of buying $1,000 worth in one go.
Why is this good?
Bitcoin is a highly volatile asset. The price can fly upwards thousands of dollars in a day, or it can do the same downwards. Imagine you put your $1,000 into Bitcoin just minutes before it dropped significantly and your investment was instantly worth 20% less. That would be a pretty bad feeling.
Of course, if you bought just before the price flew upwards, you would feel pretty good. But it’s almost like flipping a coin – we as investors don’t know which way the price is going to go next. So don’t gamble.
You can reduce risk
By spreading out your investment over time you will consistently build up your exposure to an asset. On one Monday the price might be higher, which will mean you’ll get less for your money.
On other days, the asset might be worth less and you’ll get more for your money. Over time this will average your entry price and significantly reduce the effects of market volatility.
Overall, it enables you to mindlessly invest in an asset without having to consider the price performance at all. Dollar cost averaging is a great way to invest and put your mind more at ease. Of course, it’s not guaranteed to make you money – any investment is risky, especially in cryptocurrency. However, it can reduce your overall risk and exposure to a price drop.
If you are thinking about dollar cost averaging, first make sure you have completed thorough due diligence on the asset you want to invest in. There is no guarantee that any asset is going to increase in price, especially in crypto. Here’s everything you need to know to evaluate a crypto investment.
Finally, remember that dollar cost averaging is a longer term strategy. The aim is to build a position over time by avoiding volatility and other market noise.