Dollar cost averaging is one of the most popular strategies among traders. You can set recurring payments on all exchanges. So, for example, you can buy Bitcoin for $100 every Monday.
This strategy makes it easy for you to purchase crypto. Once you have it in place, you don’t have to worry about it. Every Monday, your exchange will charge your card for the sum that you’ve selected.
If you purchase crypto by using your wallet, the process is the same. This strategy will work with any payment method that you choose.
Drawback of Dollar Cost Averaging
Dollar cost averaging (DCA) has a drawback. This strategy works very well when the market is positive. If the market is negative, you’ll lose money with this technique. For example, if you were using this technique with BTC since the beginning of 2022, you would have lost money.
If you used dollar cost averaging in 2021, when the market was positive you would have made a profit by buying Bitcoin. That’s because the price of Bitcoin kept going up. So, if you spent $200 every day on Bitcoin you would always make a profit on your previous purchase.
However, in 2022 the market started to drop. That means if you spent $200 on Bitcoin every day and the price fell every day, you would lose money every day on your previous purchases.
If you’re buying Bitcoin every Monday for 50 weeks, that’s similar to having a 50 moving average on a weekly chart. For beginners, I’ll quickly explain the idea of a moving average. Moving averages are lines that we have on the charts. Moving averages smooth the prices.
It’s really easy to calculate moving averages. You’ll take a certain period and take the average price for that. For example, a 50 moving average on a weekly chart means that we take 50 weeks, summarize them and then divide that by 50.
That gives you an average price. If you look at the price chart on Bitcoin at the beginning of 2020, it’s below the 50 moving average. In other words you would be on a loss. At the end of January you would have reached over 30 on a loss.
Use Dollar Cost Averaging Carefully
Dollar cost averaging can be helpful. However, instead of purchasing crypto weekly, monthly or even daily, you should always wait for the best moment to purchase.
Let’s say you’re investing $1,000 a month or $200 a week. You know that for January, February and March you would have $3,000 to invest. However, you shouldn’t just invest because it’s Monday.
My Experience with DCA in 2022
There’s no reason to buy on a particular day. If the market is negative, don’t buy any coins. Just hold your money.
For example, in November December and January I didn’t spend $1,000 each month on crypto. That’s because the market was negative.
So, I saved $3,000 as a reserve. When the market started to rise again and the price found strong support, it broke the trend line and we had higher lows.
I had plenty of reasons to buy Bitcoin at that point. So, I used the money that I would have spent in November, December and January at the right time.
When to Start Buying Via Dollar Cost Averaging
How long should you wait before you reenter the market? When is the best time to start buying by using dollar cost averaging?
You can observe each crypto and learn how much of its value it usually loses. For example, 30%, 40% or 50% is a lot of value for Bitcoin. It doesn’t lose 80% as other coins do. That’s because the market cap for Bitcoin is huge.
A lot of people and institutions are into Bitcoin. When the price drops to somewhere around $30,000, a lot of investors and companies are ready to buy.
They wait for these moments. So instead of rushing and purchasing every week and then watching as you lose money while the price goes down, wait.
Use DCA Carefully and Reduce Losses
Beginners lose money because they buy crypto at the wrong time and then they’re forced they sell at a loss when the price starts to drop. The exchanges emphasize the convenience of automatically charging your credit or debit card every Monday. However, it’s better for you to wait for the right moment when the price drops and you see a few buy signals.
I hope you enjoyed this article. If you want to improve your technical analysis even more, please check out the related videos on the YouTube channel and courses on technical analysis that are available here.
They cover investing, Bitcoin and cryptocurrencies. If you have any questions don’t hesitate to ask in the comments below.