By Larry Wright
Investment opportunities are easy to find; if you have chosen a potential financial market to explore and asked what kind of opportunities it has under its cloak, then upon the research, you would literally bump into hundreds if not thousands of them. Investment bonds, stocks, forex, exchange-traded funds, low-yield investment funds, and government-backed securities, there are literally hundreds of different opportunities present for you to explore.
You might not be at home with a specific financial asset or instrument, and you would want to diversify your portfolio; if that is the case with you, then you can definitely find out about or explore other potential financial markets out there.
Some people like to stick with the usual, they get themselves a 401K or start a low yield long-term financial fund with a potential centralized financial entity, and they are happy with returns, or if they want a little extreme experience with that particular asset, they would very much invest their money into a dedicated stock and see it reach a potential value only to sell it afterwards.
There are physical investments, and then there are digital investments; the bottom line is that you would be able to find all kinds of investments out there if you are really looking for them. Talking about investments, let’s not rule out the possibility of someone investing in the crypto market because of the fact that it is fairly new and provides tons of opportunities in terms of investment.
Cryptocurrencies might not have gone mainstream just yet, but there is potential there that is untapped, and people and financial organizations still need to accommodate themselves with the idea of decentralization and how cryptocurrencies work.
Simply subjecting these entities to be an instrument of investment is not going to cut it out; these need to be adopted in the mainstream industry as these could be used for the sake of buying stuff online just as you do with your fiat currencies or other modes of finance. It all began with the launch of Bitcoin, the flagship cryptocurrency, back in 2009, but since then, the crypto market has come a long way.
People used to believe that the whole idea was based on a hoax and sooner or later, the whole thing would collapse, but the crypto market has proved those people wrong all these years later as those who invested in Bitcoin at that particular time have seen greater returns than any other financial opportunity of the past.
Not even real estate has boomed like the crypto market has and shown amazing returns over the years, but there is a catch with the crypto market, and that is volatility. Those investors who are really sceptical about their investment and the items or assets they want to invest their hard-earned money into prefer if they aren’t faced with volatility.
Volatility is the measure of depreciation for a dedicated asset over time. Suppose you bought or used to buy tomatoes to make ketchup in the past, and you could buy these for, say, a dollar for the whole package but fast forward ten years, and you now have to pay $3 for those same tomatoes both in aspects of quality and quantity. What does this thing tell you?
It dawns on you the fact that even the dollar has fought inflation and has reached its present moment where you have to pay more to get the same quality or quantity of stuff. Inflation is different from volatility, inflation takes place on everything over a dedicated period of time, but volatility is more short-lived. The dollar has not seen spikes in its value going up or down over the years; it has remained pretty consistent, which means that it offers less volatility.
Every asset out there is based on the dollar or any other stronger Fiat currency, which is why these are going to offer you more consistent returns.
Bitcoin and many other cryptocurrencies, for that matter, are not based on any viable asset and are fairly new; hence it is pretty complicated to manage their volatility. So what is the best time period to invest in cryptocurrencies? Do they have a season like if you invest in summer, then you would have phenomenal returns in winter, or if you invest in winter, you could reap those benefits in summer?
There is no proper explanation for it; there is just no good time to invest in cryptocurrencies, just like there is no good time to know when a financial opportunity is going to strike; it happens out of nowhere, and more often than not, it might take you by surprise.
If you can somehow manage the volatility aspect of the crypto market, such as you have the knowledge or financial credibility to process tons of data across their specific ground, then yes, you can and should invest in the crypto market, but if you are just holding a normal arrow from your quiver and you want to shoot it into the dark, then the crypto market is not for you because it is going to chew you alive and all of your profits or even your original investment as well.
Bitcoin sees not only daily but hourly volatility, and that is hurtful for even some of the most strong investors out there. This is not a warning or a sign of caution which should push you away from pursuing or exploring the crypto market; it is just a plain hard truth that you need to embrace and pour into your system, or otherwise, you are in for a solid surprise.
There is fear of missing out among people and the fear of participating in this journey; prices are fluctuating like crazy, so when should you chip in?
How Does DCA Strategy Work in Crypto?
In the most conventional sense of the word, you buy assets right and left when their price is low and then sell them high; this is how the way of the world is but with the crypto market, this gimmick is a bit different.
For some people, it is easier said than done; there are tons of factors that are to be taken into account when buying financial assets and selling them. According to some, it should help when you take into account every bit of raw data, different analytical tools, and whatnot into account but ideally, you still won’t be able to figure it out.
And that is if you are after an absolute value that will give you 100% knowledge about that particular asset and you are not willing to go with probability, the chances are that by the time you have found that perfect value that would tell you about the future entanglements of that particular financial asset, the opportunity for which you were doing all of this has already passed.
That is why most investors don’t go timing the crypto market or any other financial market for that matter; they don’t want to indulge themselves in the thought that the market is going to shift, and that is when they are going to make their move forward; instead, they stick with dollar-cost averaging.
This is a valid technique induced by a bunch of crypto analysts and other financial entrepreneurs to reduce the impacts of volatility on a given financial asset. It is based on the fact that the investor first tries to limit the overall amount they should invest into an asset; they start small no matter what it is they are investing in, or it might be critical, it might be crypto, or it might be gold, but smaller investments are made and in regular turns as per dollar-cost averaging.
The dollar-cost averaging is the perfect technique for you to follow if you think that particular crypto or a financial asset is going to soar in the future, and at the same time, the volatility factor will be catching up to it. This really gives you a full insight into the market because you are taking things slow and not rushing into anything, which ultimately helps your case instead of ruining it.
A Brief Introduction to Dollar-Cost Averaging (DCA)
Dollar-cost averaging can be pointed out as a long-term strategy that involves investing in smaller portions of a dedicated asset over a particular period of time. It doesn’t matter what the price of the asset is; you have to engage a particular amount that you are comfortable investing into that asset over a dedicated schedule.
Suppose you start with investing just $100 into Bitcoin for every month of the year, and at the end of the day, you would have bought $1200 worth of Bitcoin by the time your investing period ends.
What is significant about dollar-cost averaging is that you have not invested $1200 at once but taken to account various momentums and swings of the market while keeping up with smaller investments into a batch formation which means you might be able to base this whole thing on your financial goals and what kind of returns you want from your regional investment. You can go on about it for months or even years, depending on what kind of goals you have set for yourself and in what narrative you want to achieve them.
The dollar-cost averaging has been thrown around like it is the most popular way to invest in cryptocurrencies, especially in the case of the flagship cryptocurrency, Bitcoin, but in reality, this thing has been around for some time now as investors have been using dollar-cost averaging to get into some of the extra rare stocks that are not that easy to buy or get ahold of for common people.
This thing has been helping those financial professionals to dodge the bullet of volatility for stock as well as for the forex market. As a beginner, if you need to have a healthy exposure to today’s financial markets, then dollar-cost averaging is the best proposal or approach that should be used by you right now.
Advantages of Dollar-Cost Averaging
You have got two options; when it comes to investing in the crypto market, you can either time the market taking into account hundreds of different variables and elements that you need to process in real-time for the sake of getting down to the insightful data which will help you to time the market exactly and as accurately as possible or you can use the dollar-cost averaging.
When it comes to timing the market, it is a highly complicated job and is purely subjective; what if you get a few of the variables wrong, and the whole analysis that you have run is suddenly kaput. It is no good, and based on that analysis; you are going to invest your money into cryptocurrency, which is based on an error on your part.
That is why dollar-cost averaging remains in effect to make real money in cryptocurrency. You won’t have to put down all of your money at once as you do this in plain chunks; you take into account the overall amount of funds that you have at hand and the goals that you have set around that particular financial asset, and then you get down to work by determining a practical value for your dollar-cost averaging.
Then you continue to invest that particular amount in your favourite crypto currency or financial asset over an extensive period of time.
You need to be assertive about the fact that whatever amount you choose is affordable to you, and you will be able to present that many dollars every single month on an agreed-upon date. Because if you skimp even for a month, then you are actually breaking the cycle, and dollar-cost averaging would have no benefit to you whatsoever.
The dollar-cost averaging actually prepares you for the volatility factors of these financial assets because you are averaging out the cost of your purchase over time which will definitely help you in reducing the overall impact in case of a sudden drop in the price of that financial asset is imminent.
The catch here is that even if the prices fall and in doing so, the opportunity to turn over your asset and score some money happens snatched from you, you can still continue to invest your money into that particular asset,, and when the market recovers you would be able to sell all of it, you are not out of big jewels of money this way, and the process is extremely convenient to follow even for a beginner level investor.
Is Dollar-Cost Averaging Strategy Better than Lump-Sum Investing?
Lump-sum investing is never recommended, especially if you are diving into a market that you don’t have any knowledge about and choosing a particular asset that you have only encountered once or twice before. It means that you are actually putting all of your confidence into that particular market and asset and just throwing away all of your money into it, it is not a healthy investment behaviour, and you should refrain from doing so.
Dollar-cost averaging is a more decent way to approach this element where you can continue to invest in cryptocurrencies or any other financial asset for that matter without having to risk the probability of losing all of your hard-earned money.
Moreover, on the bright side of things, you are getting predictable returns on your investment; suppose if you have invested in Bitcoin for three straight months, you get to analyze the market in that particular time period, and you can increase or decrease your total lump sum amount that you want to invest into Bitcoin based on this data that you have had for interacting with the market using dollar-cost averaging.
If you are thinking about the price of an asset that has grown from now but has an incredible chance of declining in the future or not, then you can bring in dollar-cost averaging into this mix and continue to invest cash into that particular asset over a period of time and eventually you will be able to reap a big profit from your investments in the future.
The main spotlight of this whole event is that it saves you from the troubles of investing a hefty amount and getting yourself into the danger zone of kissing goodbye to all of your investment if the market takes a horrendous turn. On the other hand, if you move forward with dollar-cost averaging, all you have lost is the amount that you had invested in little chunks up to that moment when the market failed.
When you are actually approaching the dollar-cost averaging, you are indeed getting exposure to all these prices that are changing each month or turn when you are to invest your money into a certain financial asset, this gives you a neat little exposure to that particular asset, and then you can figure out any dramatic increase or decrease within the price of the asset and adjust your play accordingly.
It is an extremely smart move that every investor approaching either stocks or the crypto market should keep in their mind.