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Dollar cost averaging in cryptocurrency trading
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As a crypto trader, you want to buy at the best possible price. The problem is, prices are always moving.
It’s hard to enter a market at a low point. That’s why traders have developed an investment technique that mitigates the effects of volatility, allowing you to enter a market with more confidence than you may have otherwise had.
This technique is known as Dollar Cost Averaging, or DCA for short.
It’s a simple investment method that has been tried and tested by traders across all types of asset classes.
How Dollar Cost Averaging works
You start off by putting aside the amount of money you are planning to invest in an asset. Next, you invest equal portions consistently at regular intervals until you have reached the investment level you were initially aiming for.
If prices are high, you still buy. If prices are low, you still buy. You put the same amount of money in each time, but you will get slightly more or less of the asset.
So while price goes up and down, you will be investing a set amount of money.
This strategy helps lessen the effects of price fluctuations, helping to lower your average buying price.
Here’s an example.
Let’s say you have 1,000 USD and you want to invest in Bitcoin. The price of Bitcoin is undeniably volatile.
To reduce the effects of volatility, you are going to invest using the DCA method. You plan to invest 100 USD every Monday for the next 10 weeks.
Over time, on some Mondays when you invest the price will be higher, and sometimes it will be lower. However, over the 10 weeks, you will have an average investment price that cuts through most of the volatility.
That’s it. Dollar Cost Averaging is a simple strategy, but it’s often seen as a solid way of entering a market.