Dollar-cost Averaging: All You Need To Know

what is dollar cost averaging

If you’re a person with low-scale income (money) or you don’t have enough capital to plunge into an investment by putting everything into the market at once thereby taking a great risk, consider investing your money and resources using the dollar cost averaging technique. The reason for this is that this technique favors low-income earners since it is done in bits- in a piecemeal manner.

What Is Dollar-Cost Averaging?

Dollar-Cost averaging is the opposite of the lump sum trading strategy where you plunge all your capital into the market (great revenue) damning the risks and consequences. Dollar-cost averaging is a method that involves investing a particular sum of money In stock at regular intervals usually over a long period. It is a great strategy to employ when investing instead of choosing to time the market or wait for the best opportunities as such opportunities may never come by.

What does it look like? This strategy mandates an investor to invest or put in the same or a certain amount of money in the same stock over regular intervals, notwithstanding the price of the stock.

This means that one can invest with a limited amount of money or resources by putting in little chunks of resources over time In a stock. This usually has a lot of good benefits in the long run. All that is needed is patience and consistency.

How To Calculate The Dollar Cost Average?

Now that we have established what this topic is all about, the next question is: how to calculate the dollar-cost average properly.

First of all, there is a widely accepted formula used to calculate dollar-cost averaging in most circumstances. This involves dividing the total cost by the number of total shares acquired. For example, let’s say you bought 50 shares at $5 for each share making the total cost $250, the average buyer would be $250 divided by 50 which means the average buyer is 25. Probably at another point in time the same shares appreciate and you get to purchase some 25 pieces for $250. The average would be the cost – $250 divided by the number of purchased shares which is 25, 10 becomes the dollar cost average.

You can compare the dollar cost average at the different times you purchased the shares. For the above-stated example, the comparison would be between 25 and 10.

Dollar-Cost Averaging on Crypto Platforms

Dollar-cost averaging can be done on any commodity of choice as long as there is demand and supply which leads to price fluctuations. It is also a working strategy when trading any cryptocurrency or blockchain asset. For this reason, lots of cryptocurrency platforms have integrated this strategy to help traders who decide to explore this means of investment. The platforms to integrate this strategy are majorly centralized platforms/exchanges.

To further understand this, it’s important to define what recurring buys areas are key to understanding the dollar-cost averaging on crypto platforms. Recurring buys allow users to purchase a particular quantity of cryptocurrency assets as well as set how often they would love to make these purchases over a long period. To achieve this, funds are set aside for the asset purchase. The exchange then buys at an agreed price. Recurring buys are a dollar-cost averaging strategy used and can be employed on various cryptocurrency platforms.

This usually bears different names on the various cryptocurrency platforms. While some exchanges call it buy limit, others have a different term for this trading strategy.

Binance

Binance has established recurring buys which can now be set up to buy or trade with different cryptocurrencies. Investors now employ dollar-cost averaging techniques to spread out their investments rather than choosing to invest a lump sum all at once. This is available on Binance and can be accessed once you successfully register and verify your accounts.

Coinbase

Users on the Coinbase platform are now able to create recurring buys on coinbase too. It’s a bit easier now to create recurring buys right from the buy or sell page. This means that a recurring buy is easier to establish on Coinbase.

Bitpanda

This platform has been popularized in Europe and has an interface that is quite easy to make use of. It is a great platform for this trading strategy.

A personal savings plan can be set up here using Mastercard or Visa. As soon as you are done with the process of buying for the first time, you can now set your recurring and they will be executed automatically once the funds are available. Crypto, recurring buys are also available on this platform and they are executed automatically once you set it that way.

Bitpanda offers investors an array of crypto platforms that can be invested in, so it’s always possible to invest in the whole of the crypto market while using a DCA strategy.

Dca Vs Lump-Sum Strategy: Which Is Better?

Before we get into this, note that it isn’t at all times that a particular strategy works out well. The lump-sum strategy which is the opposite of the average strategy might give a huge windfall or it can create big losses. DCA, on the other hand, might minimize losses but if the market price is high, then it doesn’t help at that instance. The second thing to note is that there’s no guarantee for the future. No strategy is free from certain downsides.

So what we’re to do here is to use statistics and available information to show which strategy outperforms the other in certain circumstances.

Since there’s no direct and satisfying answer to the question of which strategy is better than the other, let’s begin to compare these 2 strategies for what works best which can be the first option that assumes you’re an investor with a significant amount of money. On this note, you can invest all of it at once in the market. Secondly, if you have your income rolling in in trickles, you can invest equal amounts of money at regular intervals over a long time.

Lump-sum comes with a high risk which also comes with a potential for huge profits. the averaging method reduces the overall risk involved in the market to the nearest minimum. They both have benefits and the options you choose depend entirely on your choice and preferences.

Two things differentiate averaging from lump-sum strategy. Firstly, while the former entails investing money at regular intervals despite market conditions, lump sum, on the other hand, means that you invest all your money at once and at a go. Secondly, using a dollar-cost averaging technique means lower chances of risk and modest or conservative returns. A lump-sum strategy means a higher risk accompanied by big profits potential.

Now, let’s say you decide to spread out your investments over some time, you reduce risk as much as possible and gain profits that aren’t so huge which is the downside as opposed to lump-sum investing which comes with huge profits If all goes well. Of course, the downside of lump-sum investing is this: if there’s a market plunge, your potential huge profits could turn to losses, which is a bit disadvantageous. Lump-sum investing exposes one to the market fully and if the market fluctuates negatively then it avails you to buy the asset for cheaper rates., the dollar cost investor is much better than the lump sum investor.

One more thing, with dollar-cost averaging, you are likely to pay more brokerage fees in total because with dollar-cost averaging, you make multiple purchases as opposed to a lump sum strategy which takes one single transaction to happen and as such, low brokerage fees. Of course, paying a single brokerage fee will mean nothing if the market gain traction and there are losses.

At the end of the day, dollar cost averaging or lump sum strategy will depend largely on your choices and preferences. If you are the type that has the little investing experience, wishes to reduce as much risk as possible, and is willing to invest at a particular price regardless of the market, then DCA might be right for you. If on the other hand, you’re interested in taking high risks and also seek to gain as many profits as possible, then a lump sum strategy might just be right for you.

Conclusion

What we have done is to show you the nature of dollar-cost averaging and the various platforms on Crypto that allow dollar-cost averaging. We have also thrown insight into the key differences between lump-sum strategy and dollar-cost averaging, which works well in different circumstances and which is preferable.

You can make your choice as to what strategy works best for you. Always do your research to choose the best options that fit your investment plans.

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