Quick Summary:
- When Bitcoin is recording new lows every month, the Bitcoin dollar cost averaging could be your best bet as people fail to spot the bottom of Bitcoin.
- Uncertain market conditions like this might leave people waiting for a dip or make them buy high because of the FOMO.
What is Dollar Cost Averaging?
Dollar cost averaging is a strategy of investing a fixed amount of money at regular intervals. This strategy is used to reduce the risk of investing a large amount of money at one time. Bitcoin Dollar Cost Averaging is a strategy where an investor purchases equal dollar amounts of bitcoin at set time intervals. The investor is not trying to guess the market price of bitcoin but instead is using this strategy to reduce the risk of investing in bitcoin.
Since the price of Bitcoin keeps pumping and dumping and no one is sure where it will move the next day. There are two types of people:
- Those who don’t buy in the hope of getting a better buying price in the dip
- Those who buy high because of the Fear of Missing Out FOMO
Dollar cost averaging, therefore, offers a way to both types of people. The investors keep buying after a set interval of time of change in price.
Consider a person who buys Bitcoin at every red dot shown in the image above the average entry price for this person will be an ascending line.
How to Dollar cost average in Crypto
After the FTX hack, Bitcoin has been trading below the critical support zone of $20,000. There are two ways of doing Bitcoin Dollar Cost Averaging:
- Buying after a set interval of Time
- Buying After a specific change in Price
In the first approach, users set a time interval and an amount to buy Bitcoin regardless of the price. This is a little worn-out method compared to the latter. Buying after a specific price change is a decision backed by some analysis.
There are many approaches to doing DCA but here’s the one we found for beginners friendly. We use Bollinger Bands for the chart of a specific interval. Whenever the price touched the bottom line of Bollinger Bands, the buy signal executes.
Conclusion:
The cryptocurrency has experienced a lot of volatility in its relatively short lifespan. The Idea of DCA enables investors to bag more crypto when the price falls so the average buying price remains relatively lower. However, if there’s an uptrend in the Bitcoin price, the DCA strategy can backfire.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
