Bithumb Global
Published in

Bithumb Global

Beginner’s Guide to Dollar-Cost Averaging

TL:DR

Have you ever bought an asset anticipating price rise and then had to sit and watch its price plummet down?

Your eyes are glued to the ever-changing graph, but do you miss the best opportunities in the market by a whisker?

Trading takes up a giant portion of your productive time, you are stressed, yet your portfolio is a bummer; you get poor yield from your assets. If active trading is not your cup of tea, dollar-cost averaging is going to be a lifesaver for you. It is less wearing and occupies a much less amount of your time. Dollar-cost averaging best suits people who are in crypto trading part-time. It is one of the safest ways to maintain a long-term position in the market.

What is dollar-cost averaging (DCA)?

Dollar-cost averaging / constant dollar plan is an investment strategy where you divide the total budget allocated for a target asset and purchase it during regular intervals regardless of its price. This technique mitigates the impact of the price fluctuations and relieves you of the pressure of optimizing your buying time for the best prices. Stretching the purchase amount over regular intervals will smooth out the average buying price. The negative impact of a bad entry is thus ruled out to a great extent.

Investors who wish to put their savings to good use and build wealth over a long period will benefit a great deal from dollar-cost averaging. In a broad equity market, this strategy will neutralize short-term volatilities.

A real-time widely used example of dollar-cost averaging is in 401(k) plans where the employee funding is extracted from the pay check which may or may not be matched by the employer. Also, dollar-cost averaging is put to use in many dividend reinvestment plans, mutual funds, and index funds, allowing investors to reduce their risks by making contributions regularly. Dollar-cost averaging still proves to be one of the best techniques for newbie crypto traders considering the volatility of the market.

Example: Dollar-cost averaging in crypto trading

You have allocated $25,000 to invest in crypto trading. You observe that the price of Bitcoin is rising, but you are unsure whether the trend will continue. You could either use all of your money to purchase Bitcoin at once or employ the dollar-cost averaging strategy. In the second, you divide your fund into 5 equal parts of $5,000 each and buy Bitcoin for that amount every consecutive month over a period of 5 months. This way, you are not affected by the downtrend in the market as it is stretched over a longer period of time.

Pros and cons: Dollar-cost averaging

PROS:

CONS:

Wrapping up

Dollar-cost averaging best suits beginner investors and people who have little time to keep up with the changes in the market. It is definitely not a fool proof method of investing and yields little returns when compared to lump-sum investments. However, if you are looking for a strategy to minimize the impact of bad timing, this is one of the best strategies out there. No matter what investment strategy you employ, it is important to watch out for downtrends, and dollar-cost averaging is no exception.

As a global leader in digital assets management services, Bithumb Global aims to create an ideal ecosystem where all kinds of traders can safely and securely trade in a variety of instruments powered by digital assets. More importantly, it seeks to educate beginners so that they can navigate the intricacies of digital assets and trade with confidence. It facilitates an ideal launchpad for beginner traders to take their first plunge into trading. The BG Learning platform is designed to help learning fun and rewarding and it has already completed successful programs, where users have earned handsome rewards and have also gained from the rise in token prices post launch on the platform.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store