Monday, January 30, 2023
  • The strategy works for the larger percentage of Africans, who cannot get the amount they wish to invest all at once but can raise it in bits
  • Big profits require the best timing, which has proven difficult even for the most experienced traders and developers
  • The dollar cost averaging (DCA) involves breaking down your investment and investing it in bits rather than directing a lumpsum of resources all at once

Many Africans have a keen interest in entering the crypto market, but they are held back by this question; when is the right time to enter the market?

The fear of getting into the crypto ecosystem during a plunge demotivates most people, but they cannot wash away the thought that, for example, bitcoin might hit US$100,000 by 2030. Of course, that is just an opinion.

Instead of struggling to be a perfect timer of the market, which has proven difficult even to the most experienced traders and crypto professionals, there is a strategy that traders can use to capitalize on the ecosystem; the dollar cost averaging strategy.

The dollar cost averaging (DCA) involves breaking down your investment and investing it in bits rather than directing a lumpsum of resources all at once. The latter is known as the lumpsum investment strategy.

Read: What is crypto tokenomics: An evaluation guide to crypto investors

How dollar cost averaging works

This technique works best on trusted cryptocurrencies, such as bitcoin and Ethereum. A trader decides the amount of money they wish to invest, say US$1000. They then break down the amount into small investments (US$10) and spread them in a distributed time frame (1 month).

This means that in the next eight years, the trader will be able to capitalize on the market and get an average of both the bull and the bear market. If you subscribe to the belief that bitcoin will one day become the primary currency in the world, then the dollar cost averaging technique is something to consider.

The strategy, however, is feeble to the lumpsum investment, but only if the trader is a perfect market timer and buys in a dip (which is almost impossible).

How dollar cost averaging works.

How dollar cost averaging works. [Photo/ Medium]

Advantages of dollar cost averaging

  • The investor gets an opportunity to get the best average price.
  • The strategy works for the larger percentage of Africans, who cannot get the amount they wish to invest all at once, but can raise it in bits.
  • Dollar cost averaging alleviates enormous risks that have made traders lose huge amounts. The massive loss has proven to cause depression among rush traders.
  • The DCA strategy alleviates the fear of missing out (FOMO). The fear is that a trader will be left out in another historical exponential price rise. FOMO explains why most people get into the market during the bull market. The strategy is more inclined to emotions and, most of the time leads to crypto trading addiction.
  • The fear of missing out strategy also leads to panic selling in the case of a price dump. DCA reduces panic and worry as one sticks to an initial plan that does not require much tracking (trading discipline)

Drawbacks of dollar cost averaging

  • An investor will miss out on short time massive gains. Note: Big profits require the best timing, which has proven difficult even for the most experienced traders and developers.
  • DCA has higher trading costs. A trader must incur a transaction cost every time they buy the US$10 worth of bitcoin. On the contrary, DCA is a safe way to capitalize on the market, and the transaction costs will eventually become significantly small compared to the projected gains.

In conclusion, there is no sure way to invest in the crypto market. The dollar cost averaging strategy does not guarantee that you will make profits, and as a trader, one should do more research on the strategy and other ways to invest in the crypto market.

Furthermore, different investors have different financial goals, risk tolerance thresholds, opinions, and instincts. Therefore, they should research to determine what strategy works best for them.

Read: Nigeria: Crypto adoption-value depreciation tug of war intensifies

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