How does Dollar-cost averaging actually work?
By Femi Babatunde
Co-Founder, Savecoins Technologies.
How Exactly does dollar-cost averaging work?
Basics; Recurring buys into crypto, stocks, or derivative-based products.
What you understand after years of investing in the financial markets is that nothing goes up forever. Markets have cycles and with cycles come volatility. When you outrightly buy an asset, you might be entering at a peak (premium) this is more of a risk to you if the price of that asset (Crypto, stocks) falls heavily. What’s is the best way to smoothen out your entry price and take a lower risk? -Recurring buys! (Dollar Cost Averaging or DCA)
How exactly do recurring buys work?
The main advantage of dollar-cost averaging is that it lowers the chance of placing a wager at an inopportune time. When it comes to trading or investing, market timing is among the most difficult tasks. Even if a trade idea’s direction is good, the timing may be improper, making the entire deal incorrect. This risk is mitigated by dollar-cost averaging.
Take a look at an example of this DCA method. Let’s pretend we have $5000 to invest and believe Solana is a good bet. We believe the price will likely range based on the market volatility, making it a good spot to acquire and build a position utilizing a DCA strategy.
The $5000 might be divided into 100 $50 portions that is $50 in 100 places. Every day, regardless of the price, we’ll purchase $50 worth of Solana. We’ll spread our entrance out over three months in this manner.
Now let’s look at an alternative game plan to show how flexible dollar-cost averaging is. Assume Solana has just entered a bear market, and we don’t expect it to recover anytime soon and we don’t foresee a sustained bull trend for another two years. However, we believe that a bull trend will emerge at some point, and we’d like to be ready.
Is it appropriate for us to follow the same path? No, I doubt it. The time horizon for this investment portfolio is substantially longer. We’d have to plan on this $5,000 being used for this technique for a few more years. So, what are our options?
We could break the investment down into 100 $50 portions once more. But this time, instead of buying $50 worth of Solana every week, we’ll buy $50 worth of Solana every two weeks. A year is roughly divided into 52 weeks.
Using this strategy does not always guarantee profits in the market, but with the menacing volatility of the crypto market, it can be an efficient use for long-term investing!
NB; Nothing here is Financial advice.
A DCA yield calculator is available at Savecoins.co
Market cycle: Market cycles, usually referred to as stock market cycles is a broad word that refers to trends or patterns that occur in various markets or economic environments.
Volatility; It’s the pace at which the price of a security(crypto, stocks) rises or falls in response to a series of returns.
Bull Market: A rising market in securities and commodities trading is known as a bull market. A bull is an investor that expects prices to rise and buys an asset or commodity on that assumption, with the intention of reselling it for a profit later. A bullish market is one in which prices are predicted to rise in the near future.
Bear Market; A market where values of securities are decreasing and selling is encouraged