Today, many traders and industry professionals use the phrase "DCA and chill" but what does it actually mean and how does it help to improve your portfolio in the long term game? Apart from the common token nomenclature, DCA was the keyword that was most frequently used on crypto chat platforms like Our Crypto Talk and social media platforms like Twitter and Facebook in the past two months. The word intimidates many new players in the market. It's not rocket science, I assure you.
What is DCA?
DCA, or dollar-cost averaging, is the procedure of investing the same amount of money in a target asset at regular intervals over a specified time period, regardless of price. Investors can lower their average cost per token and reduce the impact of volatility on their portfolios by using dollar-cost averaging.
It's just too much to take in all at once, I guess. To understand it better, let's deconstruct this definition
When to start DCA ?
Dollar Cost Averaging is a method that is common in the choppy sideways action and is well-liked in the crypto community when there is uncertainty regarding the asset's future price action.
Wondering if is it the right time to buy crypto? We've got you covered here.
Investing the same amount of money
The secret to beginning DCA is to divide your money into equal portions as opposed to investing it all at once over time. Although there is no absolute rule that they must be broken equally, method has shown that doing so increases the precision of profit estimation and analysis.
Regular intervals over a specified time period
The investing period should be divided into regular intervals, but making a decision because of the unknown length of the period can be challenging. Regarding how long the sideways movement will last, you need an expert opinion. A variety of indicators, including Bollinger Bands and the Relative Strength Index, aid in spotting volatile movements. The typical maximum time between two purchases is two to three days.
Investing at point O,A,B,C,D yields more profit than going all in at point O
Lower the average cost per token
Let's look at an example involving two coworkers, Antony and Martin.
Antony decides to purchase $ETH with 10% of his newly earned paycheck, or $1800. On day 0, he notices a sideways movement and decides to purchase Ethereum at $1800. Antony receives one token for his purchase and decides to keep it for a long time.
Meanwhile, Martin decides to spend the $1800 by making $180 investments over the next 10 days. He purchases the same token on day 0 for $1800 and receives 0.1 $ETH. On day one, the price falls to $1750 and buys more than 0.1 $ETH. He purchases a total of 1.1 $ETH on a daily basis as the price fluctuates.
Martin purchases more tokens with the same amount as Antony, so his average cost per token is lower.
Reduce the impact of volatility
After a series of sideways movements, the market eventually settles for a volatile move, and prices are probably going to decline in a bear run. If you use dollar cost averaging, the likelihood that you will keep some of the money available for investment is high, and you can "buy the new bottom." You will receive returns on your investment if the price moves in an upward trend.
DCA covered with examples here.
Overall, DCA aids you in determining a range of time to make crypto decisions better rather than going all in at one particular time. In volatile markets, this lowers the risk. Never forget that Dollar Cost Averaging is practiced for long-term gains. It's a tactic to purchase as much as you can with a finite amount of money that will only make a difference in the long run. In the future, Martin's additional 0.1 $ETH will be significant.
If you want to use it for long-term investing and are unsure of how often to buy, think about allocating a portion of each paycheck to the essential purchases.
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