They say buy the dip and sell the high. But what if every time you believe the market has hit the rock-bottom, it drops even more?
This is the reality of Bitcoin. The extreme volatility and unpredictability make timing the market difficult and stressful. You regret it if you buy too soon and then the price drops. And if you wait for the price to drop further and it goes up instead, you feel even worse.
This raises the question: is there a strategy that can help maximize profits without having to deal with the stress and risk that comes with trying to time the market right?
The answer is yes! Dollar-Cost Averaging may be the answer you’re looking for.
Let’s see what it is and how it works.
Dollar-cost averaging is a long-term investment strategy that aims to reduce the effect of short-term volatility on the overall purchase.
It does so by requiring you to divide the total investment money into small, equal, and fixed portions. You then use these to buy Bitcoin at regular intervals regardless of its price at a particular moment.
Let’s take a simple example and assume that there are two investors. Investor A always DCAs and investor B tries to buy the dip. Over a period of 4 months, let’s also assume that the price of a certain cryptocurrency was $40, $60, $120, and $100 per coin at the end of each month.
Given the fact that this coin is in an uptrend, investor B would see the price at the end of the fourth month as a good dip. And he might make an entry at $100.
On the other hand, investor A’s average investment at the end of the fourth month would be $80 (because he’s using a fixed amount of money to buy the coin).
Now suppose the price of this currency falls to $90 the next month. What will happen? Fearing a further decrease in the price, investor B will panic and exit his position, incurring a loss of $10.
Investor A would be in a position to exit if he wanted to and that too with a profit of $10. But instead of exiting, he will buy some cryptocurrency again at the new price of $90, which will further decrease his average buying price. This way he will be able to minimize the risk of short-term volatility and successfully build up his position over a long period of time.
As evidenced by the example, the DCA strategy works better because it filters out the market noise, makes investing less emotional, and doesn’t depend on timing the market correctly.
When you decide to DCA all the way, you make a trade-off. You decide to give up the opportunity for higher rewards in exchange for low risk.
Bitcoin flash crashes and exponential price increases provide excellent opportunities for investors to make big money by buying the dip and selling when the price explodes.
DCA doesn't allow you to benefit from these potential short-term trade setups. When you DCA, buying the dip by timing the market right will be your only shot at making insane profits.
The downside of buying the dip is scary though. Buying a large lump-sum amount in one go exposes you to too much risk, especially in an extremely volatile market like crypto where prices can plummet by several times within weeks if not days.
Nonetheless, the fact that Bitcoin is a well-established cryptocurrency by now makes it safer to buy its dip.
Bitcoin has also survived several price crashes and always came back stronger. Just recently, the price crashed from $64,000 to $28,000, and then bounced back to reach a new all-time high of $69,000. All of this happened within weeks. And a lot of money was made.
Dollar-cost averaging and buying the dip both have their own drawbacks and don’t allow you to maximize profits in the safest way possible. While DCA is a long-term strategy that lowers your risk as well as your reward, buying the dip exposes you to too much risk.
Luckily, there is another way that uses both strategies to maximize your profits.
Instead of dollar-cost averaging over time, you can dollar-cost average whenever there is a price drop in the market. In other words, you can buy every time the price falls. This strategy will give you a higher return without having to worry about timing the market accurately.
This strategy is very similar to DCA. The only difference is that you have to schedule your buy orders not only at regular intervals but also in accordance with market drops. If you are trying to build a position in Bitcoin, then set a limit buy order that automatically executes if the price of Bitcoin falls by, let’s say, 6%.
By allowing you to automatically buy the dip, this strategy offsets the most notable criticism of DCA, which is lesser returns compared to buying the dip.
DCA, by consensus, is the safest long-term investment strategy when it comes to crypto. It keeps your investment safe from the effects of innate human emotions of greed and fear, and lets you build your position safely over time.
Tweak this strategy a little as described in this article, and it’ll let you buy the dips too. And that too without having to worry about timing the market correctly and exposing your investment to too much risk!
