Dollar cost averaging is one of the most popular methods of investing in cryptocurrencies, especially when an investor plans to purchase a particular crypto asset over a long period of time.
Generally, to "dollar-cost average," an investor pre-sets a total amount that for example, they want to use to purchase Bitcoin. They then set regular times to purchase the Bitcoin they want such as weekly and stick to those times no matter what Bitcoin's price is. Usually, dollar cost averaging or DCA is meant to occur over a longer period of time, like months or even years in some cases.
Why is dollar cost averaging beneficial?
Dollar cost averaging is beneficial because it reduces the potential effect of volatility on the purchase of an asset like Bitcoin, which is by its nature, highly-volatile. Truthfully, DCA has a long history of being used even before the existence of cryptocurrencies in the management of mutual funds, index funds, and 401k plans. As a strategy, it has this longevity because of its simple, yet effective value proposition. The longer you DCA the money you want to invest in an asset, the longer some of your money is kept free of the potential risk of that asset's volatility.
Is dollar cost averaging risky?
Generally, dollar-cost averaging is seen as a conservative, safe investment strategy.
Still, the key risk is that an investor will think that they can DCA instead of doing real diligence into an asset and what makes it valuable. Additionally, like any other investment strategy, it’s never advisable to use it alone without taking other strategies and indicators into account.
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