Dollar Cost Averaging (DCA): Step by step guide

Investing in cryptocurrency involves a lot of risk. One of the best ways to reduce the risk is by using dollar cost averaging (DCA).

What is Dollar Cost Averaging? 

Dollar Cost Averaging is the spreading of your investment over a period of time. 

In cryptocurrency, DCA is the buying of a particular cryptocurrency with a fixed amount over a particular period of time. 

For instance, you want to invest in cryptocurrency with $1000.

Rather than buying the cryptocurrency at once, you decide to buy $100 worth of the coin every week. 

You are buying the same cryptocurrency at different prices over a period of time irrespective of the changes in price.

For instance, bitcoin was trading around $29,000 as at January 2021 before it reached a new all time high of $68,000 in November 2021.

Same BTC that maintains a wave of bullish trend in 2021 has been in a bearish trend since the beginning of 2022.

Anyone that bought BTC during November 2021 will surely be in massive loss if they have not sold their crypto.

How to avoid risk in crypto trading?

Avoiding risk in crypto trading means you will stop trading completely nevertheless you can minimize the risk by using Dollar Cost Averaging.

Going back to our previous example, if you bought 1 BTC when it was worth $68,000. You bought another one as of January 2022 when it was $33,000.

Instead of the price increasing, it kept going down so you took advantage of the market and bought another BTC when it dipped to $19,000.

The total cost of your 3 BTC is $120,000 (68,000+33,000+19,000). This means the average cost of your holding is $40,000.

Recurrent purchase of BTC in the bearish market has helped to reduce the risk so instead of waiting for BTC to break $68,000 due to your first purchase, you will be in profit any point above your average price which in this scenario is $40,000.

Factors to be considered before you use Dollar Cost averaging 

• Know the difference between trading and investing. 

There is a thin line that demarcates trading from investing and that is the time frame. 

Trading is usually for a short period of time which can be within minutes, hours, days, and in rare cases weeks. 

Investing on the other hand has to do with years but sometimes can be for weeks and months. 

When you are investing, you are thinking about the future gain and not the immediate gain. 

• Do Your Own Research

Dollar Cost Averaging also involves risks so there is a need to do your own research. Read how to do your own research

Understanding the viability of the coin you want to buy is very important. 

Using DCA and buying a non-viable coin might lead to loss of money though the loss might be minimized.

• How much can you afford to lose? 

This is the last question after you have decided whether you are trading for the short term or investing. 

If you are investing, doing your own research will help you decide on the coin you want to buy. 

Then, how much can you afford to lose? 

The amount you can afford to lose is different from how much you can invest so think deeply about your capability before using DCA. 

Criteria to using Dollar Cost Averaging (DCA)

• Source of income 

If you did not have any source of income, preferably a stable one, don’t think about DCA. 

Since you are going to be buying a particular coin at intervals, there is a need to have a source of income. 

Kumo offers a passive source of income which can be of great advantage. 

Instead of working tirelessly so as to meet up with periodic buying, you can use the premium Kumo investment package. Invest with your stablecoin and earn interest which you can use to continue your Dollar Cost Averaging

• Discipline

WITHOUT discipline, it might be hard to keep up with the buying decision. 

Your ability to profit from dollar cost averaging lies with your commitment to buy as and when due. 

• Understanding 

This is still coming up in another form. 

It entails having a good understanding of what you are venturing into. 

Don’t just buy because others are buying. You can read what you need to make money from crypto space. 

When can I withdraw from DCA? 

• Planned time frame. 

If your aim is to buy a coin every week for 10weeks, at the end of the 10th week, you can decide to sell but only if you are in profit. 

• Massive returns

You can withdraw from your DCA if there is massive return before your stipulated time. 

You can still keep up with your plan it incase of massive return, withdraw the excess. 

• Change in fundamental analysis 

If you notice anything bad about the cryptocurrency you are buying using DCA, don’t hesitate to pull out. 

This does not mean selling because the price is low. 

You are selling because you did not see any future again in the cryptocurrency. 

You can use Dollar Cost Averaging with underlying principles of wealth creation.

Using dollar cost averaging requires a wallet where you can easily buy, sell and swap. 

It requires a wallet where you can track your purchases over time so as to know the dollar cost average. 

Kumo wallet is a perfect wallet for dollar cost averaging as it provides easy access to buy, sell, swap and keep record of your purchases.

About Kumo

Kumo, registered as Kumo Technologies Inc in Delaware, U.S. is a fiat and crypto social payment app which allows users to exchange fiat (NGN) to crypto, save and earn interest in dollar with as low as $5, utility payment such as DSTV subscription, airtime, data among others.

Kumo wallet is your all-in-one social payment app for seamless payment solutions.

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