Dollar cost averaging is a strategy that has been promoted by many investing gurus. With this simple technique, investors can accumulate wealth over time by making regular purchases of a particular asset.
One such asset is Bitcoin, which is particularly volatile and may discourage some traders from getting involved with it. However, they can leverage dollar cost averaging to help manage the risks stemming from these severe price fluctuations.
What Is Dollar Cost Averaging?
Many investors try to time the market. "Buy low and sell high," the traditional wisdom says. Unfortunately, following this adage is a bit easier said than done. Some investment gurus have repeatedly warned against trying to time the market. Warren Buffett, the Oracle of Omaha, is one of them.
While some investors, such as money managers, may boast about the times they made accurate predictions about the market, this usually isn't something they can do on a regular basis.
Instead of trying to time the market, investors can engage in dollar cost averaging and make regular purchases of a specific asset.
For example, if an investor wanted to build up holdings of Bitcoin, you could buy US$100 worth of this digital currency every week, slowly building up a reserve of this digital asset. You would simply pick a time—like every Friday afternoon—to make these regular purchases. This way, if Bitcoin's price went up, you would buy a reduced amount of the digital currency, but if the digital currency's price went down, you would buy more.
The design of taking this approach is to "average out" the cost of purchasing Bitcoin over time.
One way that traders can make dollar cost averaging easier is by setting up regular, automatic investments.
Investors who are interested in purchasing stocks would set up an arrangement with their broker to accomplish this. However, traders who are interested in taking this approach with Bitcoin may consider using available smartphone apps. For example, there are some that take the change left over from purchases and then invest it in digital currency through an exchange.
Some people have a difficult time getting started with their investing plans. They may be nervous about putting their money in to the wrong asset, or they feel that they don't have enough money to invest.
With dollar cost averaging, an investor can begin accumulating wealth with a small amount of money and build up their resources over time.
Benefits Of Dollar Cost Averaging
In addition to making it easier for investors to get started, dollar cost averaging has a few benefits.
These benefits include:
Using an automatic approach can help an investor refrain from being swayed by the latest news and its effect on the markets.
Investors may actually save a significant amount of time by using dollar cost averaging and making regular purchases of Bitcoin instead of regularly scrutinising the news in order to buy and sell at the best possible times.
Leveraging this strategy can help a trader detach emotions from their investments. By relying on an automated process, investors can avoid the emotional roller-coaster that many go through.
Drawbacks Of Dollar Cost Averaging
Like everything else, dollar cost averaging has benefits and downsides.
One major drawback of harnessing this approach is that an investor could miss out on some very appealing returns.
Also, Bitcoin can experience very strong price fluctuations, so utilising dollar cost averaging can cause an investor to miss out on some great buying opportunities, therefore generating lower returns than they would otherwise obtain.
While there are countless strategies available to investors, dollar cost averaging is a straightforward method that can be highly beneficial. By using this technique, investors can gradually build up wealth.
Additionally, taking this approach helps investors avoid relying on the news to inform their strategy. By making the same investments regardless of what's taking place in the media, dollar cost averaging can help investors avoid some of the ups and downs associated with investing, especially in a volatile field like cryptocurrency.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…