October 1, 2023

Dollar Cost Averaging (HODL strategy)

Trading in financial markets can be stressful and time-consuming and still produce poor results. However, there are other options. Like many investors, you may be looking for an investment strategy that is less demanding.

What if you want to invest in a particular market but don't really know how to get started? Better yet, what would be the ideal way to build a longer-term position? In this article, we discuss an investment strategy known as DCA or Dollar Cost Averaging, which provides an easy way to reduce certain risks in a position.

What is Dollar Cost Averaging?

Dollar cost averaging refers to the investment technique of investing fixed amounts at regular intervals (for example, $20 per week). This is a strategy used by investors who want to reduce the impact of volatility on their investment and, therefore, lower their risk.

The term, often abbreviated as DCA, was coined because such a strategy opens up the potential to reduce the average cost of the total amount of assets purchased. As an investor, this would allow you to take a position gradually rather than doing it in one move.

Investing in bitcoin without DCA

Eric has $10,000 to invest in bitcoin and places 1 buy order at the price of bitcoin around $19,100.

Eric now owns 0.5325 BTC.

Investing in bitcoin with DCA

Johanna has $10,000 to invest in bitcoin, but instead of buying all her bitcoin now, she decides to purchase $1,000 worth of bitcoin each month - spread out over 10 months.

Within 10 months of navigating volatile prices and both highs and lows, Johanna owns 0.8323 BTC.

While both examples had invested the same amount, Johanna will have more assets in her account at the end.

DCA investment strategy at its best

If you have some experience trading, you will quickly realize that you can improve the performance of your dollar cost averaging strategy by using a few simple tools.

When you go this route, you buy bitcoin every time a set of simple technical analysis tools give you a signal, rather than using a fixed time interval.

Some examples that traders can use to optimize this strategy include buying when BTC approaches a moving average (such as the 200 MA) and by looking for unusual values of oversold (stoch RSI or bollinger bands).

Benefits of Dollar Cost Averaging

  • Less risk to buy the top
  • No large upfront investments
  • More learning time (instead of losing money by learning) to better understand your assets
  • More chances to buy at a nice discount
  • Less emotional stress

Drawbacks of Dollar Cost Averaging

  • Reduces the likelihood of buying at the bottom
  • Requires more time and patience
  • Poorer performance in a bull market

For example, if bitcoin is in a strong bull market, the best move is definitely to make the entire purchase at once, since with the next DCA purchase, the price is likely to be higher.

This is a major disadvantage of the DCA investment strategy.

On the other hand, however, how can you be sure if bitcoin is in a bull cycle? What if the price has just shown some strength and by the end of the month the whole move retraces?

Explanation: satoshis

Similar to how the dollar is divisible into 100 units called cents, bitcoin is divisible into 100,000,000 units, and each is called a satoshi or sat. Buying small amounts of bitcoin is often called stacking sats.

1 sat0.00000001 BTC
10 sats0.0000001 BTC
100 sats0.000001 BTC
1000 sats0.00001 BTC
10,000 sats0.0001 BTC
100,000 sats0.001 BTC
1,000,000 sats0.01 BTC
10,000,000 sats0.1 BTC
100,000,000 sats1 BTC
Price of 1 BTC divided by 100 million = price of 1 sat

First published on dutchcryptonews.com

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