Recently, digital asset exchange Coinbase decided to take the time to explain why in crypto markets (as with traditional financial markets) "there’s no crystal ball that can predict the 'perfect' time to buy" , how the time-tested technique of dollar-cost averaging (DCA) "can make market volatility work in your favor", and how its platform supports DCA.
As Coinbase correctly pointed out on June 7, its intention was not to offer any kind of "investment advice" (since Coinbase is not a licensed/regulated investment advisor), but rather to explain what DCA is, explain how it can be used for investing in crypto, and how its platform's "recurring buys" feature can help its customers to "take advantage of DCA."
What Is Dollar-Cost Averaging (DCA)?
Here is how Investopedia defines DCA:
"Dollar-Cost Averaging is a strategy that allows an investor to buy the same dollar amount of an investment on regular intervals. The purchases occur regardless of the asset's price."
It is not the quickest way to get rich, but it does provide "a way for an investor to neutralize short-term volatility" in the market he/she is interested in. One very popular use case for DCA is in retirement savings plans sponsored by employers.
How Does Dollar-Cost Averaging Help Investors to Deal With Market Volatility?
Coinbase's blog post reminds investors that "Cryptocurrencies like bitcoin have experienced price volatility in the past with values swinging double-digit percentage points in a single day — and sometimes even in a single hour." And once crypto prices start moving, "there’s no shortage of FOMO around whether it’s the right time to buy or not," which can mean "a lot of anxiety, uncertainty, or fear to participate at all."
When the Bitcoin price is down, investing $100 into Bitcoin will allow you to "purchase more bitcoin", thereby increasing your potential profit 'if the market turns around." And when the Bitcoin price is up, $100 that you are investing will "purchase less bitcoin", thereby reducing your risk of loss if the price reverses course.
This means that DCA "can be an effective way to own crypto without the anxiety of committing a significant amount of capital at a fixed price at a particular moment in time."
How Does Coinbase Support Dollar-Cost Averaging for Investing in Crypto?
Coinbase has an interesting feature called "Recurring Buys" (or more generally, "Recurring Transactions") on both Coinbase Consumer (Coinbase.com) and on the Coinbase mobile apps for iOS and Android. This feature allows you to invest in cryptocurrency "slowly over time by scheduling buys daily, weekly, or monthly."
For ultimate flexibility, you should go to the "Recurring Transactions" page on Coinbase.com. Here is what the screen for setting up a new recurring transaction looks like:
Coinbase will then automatically repeat the specified transaction (at the requested interval) until you modify it or cancel it. Therefore, taking advantage of DCA is as easy as setting a recurring buy transaction.
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