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Why Bitcoin dollar cost averaging could be your best bet in the current market

Bitcoin dollar cost averaging could be the best strategy for long-term investors during every dip, following the FTX crash.

Related: Can Proof of Reserves prevent another FTX?

Trading in cryptocurrencies was booming by the end of 2021 as the market reached record highs due to a surge in interest from institutional and retail investors.

One year later, the euphoria is largely gone, with the market cap of all cryptocurrencies falling from $3 trillion to roughly $1 trillion as 2022 draws to a close. Macroeconomic reasons, such as decades-high inflation and a considerable tightening of monetary conditions by major central banks, which have moved investors away from risky assets, have contributed to a sharp decrease in cryptocurrency values.

The ferocious volatility in the cryptocurrency market and the sharp falls have been playing with investors’ emotions in addition to their wallets; some of them have lost a lot in just a few months. The predicted leverage ratio for Bitcoin futures, which fell substantially this week, is evidence of this.

Bitcoin dollar cost averaging

Due to this, a lot of strategists suggest that traders modify their approach in light of the current macroeconomic environment. In this sense, bitcoin dollar cost averaging (DCA) is a trading method that spares traders’ emotions while simultaneously reducing the amount of time they must spend monitoring the cryptocurrency market.

Due to the fact that bitcoin dollar cost averaging (DCA) does not require any complicated tools, it has become a popular strategy for stock investors. The majority of stock trading apps on the market are competent for executing this specific investment plan.

When someone believes their investments will improve in value over the long run and encounter price volatility along the way, bitcoin dollar cost averaging (DCA) may be the best option.

What exactly is bitcoin dollar cost averaging?

Buying and selling the same amount of an asset at regular intervals over a predetermined period is referred to as a bitcoin dollar cost averaging (DCA) trading strategy. This trading strategy disregards momentary price fluctuations, enabling investors to lower the average cost per share and protect against excessive market volatility, which is especially noticeable in the cryptocurrency markets.

A distinct method that entails purchasing or selling an asset in a single transaction is lump sum investing, which is different from bitcoin dollar cost averaging (DCA). Contrary to bitcoin dollar cost averaging (DCA), lump sum investing requires investors to continuously watch the market and either acquire or sell assets at a prospective low or high. The long-term reduction of investment costs is DCA’s primary goal rather than market timing, which is not its primary focus.

In contrast to investing in conventional assets, bitcoin dollar cost averaging (DCA) has a slightly different meaning in the cryptocurrency world. Although the bitcoin dollar cost averaging (DCA) may be used for both buying and selling stocks, most Bitcoin investors prefer to utilize it for accumulating the digital asset over the course of regular intervals rather than for selling.

Why Dollar Cost Averaging Is Beneficial?

Utilizing the bitcoin dollar cost averaging method to purchase cryptocurrency can provide investors with a level of security that is impossible to achieve when trying to time the market. If one purchases cryptocurrency methodically and without worrying about price fluctuations, the goal is to amass more of it, especially Bitcoin. Price reductions make it possible for bitcoin dollar cost averaging (DCA) investors to spend the same dollar amount on more Bitcoin.

Contrast this with investors who purchased a sizable quantity of Bitcoin near its top in 2021, believing it would continue to increase. However, due to market turbulence, cryptocurrency values have fallen to multi-year lows. Panicking, many investors have sold their Bitcoin holdings at prices as low as $20,000 or $30,000, incurring significant losses.

An examination of equity investing revealed that frequent traders and price monitors are the major types of retail investors who make bad trading decisions. Investors in stocks and cryptocurrencies can avoid having to continually watch prices and try to purchase cheap and sell high due to the DCA’s methodical approach.

For cryptocurrency buyers who lack the experience and understanding to choose the ideal times to buy, the DCA technique may be especially helpful. It’s also a tried-and-true strategy for long-term investors who don’t want to monitor prices every few hours.

But more than anything, given the market’s extreme volatility, where market timing is becoming more and more challenging, bitcoin dollar cost averaging (DCA) could be particularly helpful in cryptocurrency trading. Keep in mind that the main objective is to accumulate wealth over the long term through methodical investing.

How to Dollar Cost Average into Bitcoin

Even now, many people are still hesitant to invest in bitcoin. This has hampered its capacity to recover. It does not imply, however, that now is not a good time to buy given the state of the market.

Those looking for a chance to buy the bottom may miss their opportunity as the market may gradually rebound. However, it could potentially decline even further.

It can be challenging to time the market, particularly in the current environment. Therefore, after each downturn, bitcoin dollar cost averaging would be the optimal course of action.

Another effective tactic might be to follow the whales’ lead. For instance, over the past two days, BTC has seen some relief from the bears. It is no accident that whale populations have been growing during the same period, adding to the most recent increase.

Bitcoin dollar cost averaging

Since Bitcoin has been heavily discounted from its recent high, the current price is favorable for entering the market. There is still a chance of more decline, but BTC has a history of unforeseen rallies. The greatest hope for long-term investors is to use a bitcoin dollar cost averaging technique throughout each slump.

Bitcoin Dollar Cost Averaging Calculator

Using the bitcoin dollar cost averaging (DCA) technique, investors divide their available funds into 12 equal portions, each of which is used to purchase one bitcoin each month. To put it another way, when BTC prices are falling, investors buy more of the asset, and when they are rising, they buy less of it.

The strategy has so far produced outstanding outcomes.

For example, according to the DCA calculator at CryptoHead, $1 invested in Bitcoin each month since it peaked at over $20,000 in December 2017 has generated cumulative returns of $163 for investors. That amounts to a steady 200% return on investment.

What would happen if you had invested $1 in Bitcoin monthly?

Bitcoin dollar cost averaging

The long-term upward bias of BTC’s pattern is another foundational idea behind the Bitcoin DCA method. Menger asserted that investors might “defeat 99.99% of all investment managers and corporations on planet Earth” by purchasing Bitcoin on a regular basis for a specific dollar amount.

Bitcoin Dollar Cost Averaging Example

Let’s examine this approach with a concrete example. Let’s assume we have a fixed budget of $10,000 and believe investing in Bitcoin is a sound option. It’s a good time to stock up and develop a position utilizing a bitcoin dollar cost averaging (DCA) technique because, in our opinion, the price will probably range in the current zone.

The $10,000 might be split into 100 $100 portions. No matter the price, we’ll purchase $100 worth of Bitcoin every day. In this approach, we’ll space out our submission over around three months.

Let’s now use a different game plan to illustrate the adaptability of dollar-cost averaging. Let’s assume that Bitcoin has recently entered a bear market and that a sustained bull trend won’t begin for at least another two years. However, we would like to get ready in advance because we do anticipate a bull trend eventually.

Should we employ the same strategy? I doubt it. This investment portfolio’s time horizon is substantially longer. We would need to be ready for the possibility that this $10,000 will be set aside for this plan for a while longer. So, which option do we choose?

We could again divide the money into 100 of $100 portions. We’re going to buy $100 worth of Bitcoin each week this time, though. The complete plan will be carried out over a period of little less than two years as there are roughly 52 weeks in a year.

By doing this, we’ll develop a long-term position as the decline plays out. Additionally, we have reduced some of the dangers associated with buying during a decline, ensuring that we won’t miss the uptrend when it begins.

However, keep in mind that this approach would be risky since we would be buying during a slump. Some investors might find it preferable to hold off on investing until the downtrend’s termination has been established before doing so. The average cost (or share price) will probably be higher if they wait it out, but much of the downside risk is reduced in exchange.

Is it therefore a good time to Bitcoin Dollar Cost Averaging into cryptocurrency now?

Bitcoin dollar cost averaging can be used at any time; nevertheless, it’s crucial that the investor has a strong belief in the long-term potential of the investment. The bitcoin dollar cost averaging (DCA)  approach can assist in reducing the strain of trading and the responsibility of determining the “peak” or “bottom” if the conviction is present.

Conclusion

Investors should seriously consider committing to the bitcoin dollar cost averaging technique as a means of investing in digital assets – assuming strong convictions be prevalent – in an environment where Bitcoin prices remain extremely susceptible to the general macroeconomic conditions.

Investors will avoid the stress brought on by fluctuating markets and save a lot of time by not having to check markets every day. All that is required to acquire or sell the asset is a wallet for storing cryptocurrency and an exchange, whether it be centralized or decentralized. Perhaps most essential, though, is that by focusing on the long-term potential of a few well-chosen digital assets, the bitcoin dollar cost averaging (DCA)  method can shield crypto investors from the frequent errors of correctly predicting the market bottom.

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Disclaimer: This blog is for educational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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