Dollar Cost Averaging or DCA is a long-term investment method focusing on buying up a certain amount of investment units for an extended period of time without worrying about the short-term price fluctuations.
This investment method is quite popular among all asset classes, including equities, mutual funds, and even gold. However, to a new asset class like cryptocurrency, would this scraping method work? To give an answer to this question, you have to first understand the principle behind the DCA and how to adapt it to your needs.
Ignore the Volatility and Look at the Bigger Picture
Firstly, you need to shake off old trader habits and disregard the short-term price swings and fluctuations. To become a long-term investor and capitalize on the benefits of DCA, you need to step back and look at the bigger picture. Your investment should not be less than three years (some of the long-term investors even picture a lifelong investment.)
If you think cryptocurrency, such as Bitcoin, has long-term growth potential, DCA-ing into it will help mitigate the risk of short-term high volatility. It is also best to just set buy orders at regular intervals and just forget about it, this will help keep your mind out of the noises in the market. Come back to check every once in a while and see your portfolio grows!
Keep Averaging on Regular Intervals
After you found yourself an asset that is worth investing in long-term (3 years+), now it’s time for you to set a regular buying interval. Should it be once a week or a month, choose something that best fits you.
Whichever you choose, the key is to continue to average buy at a regular interval. Disregarding uptrends and downtrends, and only focusing on the fundamentals analysis (FA) similar to when the value investor (VI) pays more attention to the business growth and development than the actual price of the stock.
Do not be Afraid to Cut Losses When the Fundamentals have Changed
Even though DCAing focuses on the continuing investment with no regard for the asset’s price, one common mistake people tend to make is that they are afraid to sell the asset even when the fundamentals have changed. For example, if the company has lost its competitive advantage to its rival, or if the Bitcoin blockchain has finally been breached.
Due Diligence is Key
Lastly, an extensive amount of research and analysis should be done before you start DCA-ing into any asset, as it will be a longstanding investment. Choosing a bad asset to DCA in would be like pouring your water into a sand dune and hoping one day it will become an oasis.
You can also experiment and backtest this investment method with a Bitcoin DCA simulation from dcabtc.com. The site allows you to utilize the Bitcoin Investment Calculator to explore different DCA parameters to see how your portfolio would have performed.