One of the foremost strategies to eliminate price risk and emotional biases is to implement a dollar-cost averaging strategy. This method involves buying a certain dollar (or any other currency) amount of an asset on a periodical basis – be it daily, weekly, or monthly. There are several positive aspects to using this strategy, especially for those with limited investment knowledge.
As with any investment strategy, the goal is to use the process to your own unique advantage. Those who invest in Bitcoin and other cryptocurrencies with money earned in fiat would do well to implement a periodical dollar-cost averaging strategy.
The name may involve the dollar, but the core concept is to convert fiat to an asset that appreciates. In essence, the objective is to periodically trade a value eroding asset for an appreciative asset. Fiat currencies in countries with even .0001% inflation will, by default, lose value over time.
On the other hand, Bitcoin is disinflationary and gains value over time. This is the core investment thesis, and this is why dollar-cost averaging is probably the most profitable long-term strategy.
By far the biggest advantage of DCA is eradicating emotional biases and preventing FOMO from materializing. By committing to invest a certain amount in each period, an investor can prevent over-allocating money to an asset. At the same time, it stops the investor from refraining from investing due to price biases they may have. This is an incredibly important point for novice crypto investors given the uncertainty and volatility that runs rampant in the space.
Trying to time the market as an amateur is both ineffective and daunting. Periodical investments that ignore short-term noise in the market help those with minimal investment knowledge to invest as they learn more about the market.
Even seasoned investors believe in the power of dollar-cost averaging; this isn’t a strategy limited to just amateurs.
With Bitcoin, dollar-cost averaging is a superior strategy. But using this with financial markets, in general, may lead to compounded long-term losses. One should realize that dollar-cost averaging is only effective if the asset being invested in is sound and capital appreciative.
Considering the historical trajectory of the Bitcoin price, it is safe to say that this strategy will work with the world’s biggest cryptocurrency for the foreseeable future. But this shouldn’t be replicated in other markets on a whim.
Dollar-cost averaging in other markets requires some level of due diligence. Implementing this into an S&P or SENSEX ETF makes sense for the long term. But with individual altcoins and stocks – in general – it is advisable to dollar-cost average only if you have done considerable research and find the investment thesis incredibly compelling.
The Bitcoin price has been parabolic, and many who haven’t resorted to this strategy have missed out on some huge moves. Emotions are the single largest detriment to a robust investment portfolio; don’t let noise shape your long term outlook.