INTRODUCING THE DOLLAR-COST AVERAGING (DCA)?
By olushola
INTRODUCTION
Active trading can be stressful, time-consuming, and still yield poor results. However, there are other options out there. Like many investors, you might be looking for an investment strategy that is less demanding and time-consuming. Or just a more passive investment style. You have many choices in the Binance ecosystem, including staking, lending your assets in Binance Savings, joining the Binance mining pool, and more.
But what if you want to invest in the markets but don’t really know how to start? More specifically, what would be the optimal way to build a longer-term position? In this article, we’ll discuss an investing strategy known as DCA, or dollar-cost averaging, which provides an easy way to mitigate some of the risks of entering a position.
WHAT IS DOLLAR-COST AVERAGING?
Dollar-cost averaging is an investment strategy that aims to reduce the impact of volatility on the purchase of assets. It involves buying equal fiat amounts of the asset at regular intervals.
The premise is that by entering a market like this, the investment may not be as subject to volatility as if it were a lump sum (i.e., a single payment). How so? Well, buying at regular intervals can smooth out the average price. In the long term, such a strategy reduces the negative impact that a bad entry may have on your investment. Let’s see how DCA works and why you might want to consider using it.
HOW DOES DOLLAR-COST AVERAGING WORK?
Let’s look at this strategy through an example. Let’s say we’ve got a fixed dollar amount of $10,000, and we think it’s a reasonable bet to invest in Bitcoin. We think that the price will likely range in the current zone, and it’s a favorable place to accumulate and build a position using a DCA strategy.
We could divide the $10,000 up into 100 chunks of $100. Each day, we’re going to buy $100 worth of Bitcoin, no matter what the price. This way, we’re going to spread out our entry to a period of about three months.
Now, let’s demonstrate the flexibility of dollar-cost averaging with a different game plan. Let’s say Bitcoin has just entered a bear market, and we don’t expect a prolonged bull trend for at least another two years. But, we do expect a bull trend eventually, and we’d like to prepare in advance.
Should we use the same strategy? Probably not. This investment portfolio has a much larger time horizon. We’d have to be prepared that this $10,000 will be allocated for this strategy for another few years. So, what should we go for?
We could divide the investment into 100 chunks of $100 again. However, this time, we’re going to buy $100 worth of Bitcoin each week. There are more or less 52 weeks in a year, so the entire strategy will execute over a little less than two years.
This way, we’ll build up a long-term position while the downtrend runs its course. We’re not going to miss the train when the uptrend starts, and we have also mitigated some of the risks of buying in a downtrend.
But keep in mind that this strategy can be risky — we’d be buying in a downtrend after all. For some investors, it could be better to wait until the end of the downtrend is confirmed and start entering then. If they wait it out, the average cost (or share price) will probably be higher, but a lot of the downside risk is mitigated in return.
DOLLAR-COST AVERAGING CALCULATOR
You can find a neat dollar-cost averaging calculator for Bitcoin on dcabtc.com. You can specify the amount, the time horizon, the intervals, and get an idea of how different strategies would have performed over time. You’ll find that in the case of Bitcoin, which is in a sustained uptrend over the long-term, the strategy would have been consistently working quite well.
Below, you can see the performance of your investment if you’ve bought just $10 worth of Bitcoin every week for the last five years. $10 a week doesn’t seem that much, doesn’t it? Well, as of April 2020, you would’ve invested in total about $2600, and your stack of bitcoins would be worth about $20,000.
Performance of buying $10 of BTC every week for the last five years. Source: dcabtc.com
BENEFITS OF DOLLAR-COST AVERAGING (DCA)
The main benefit of dollar-cost averaging is that it reduces the risk of making a bet at the wrong time. Market timing is among the hardest things to do when it comes to trading or investing. Often, even if the direction of a trade idea is correct, the timing might be off — which makes the entire trade incorrect. Dollar-cost averaging helps mitigate this risk.
If you divide your investment up into smaller chunks, you’ll likely have better results than if you were investing the same amount of money in one large chunk. Making a purchase that’s poorly timed is surprisingly easy, and it can lead to less than ideal results. What’s more, you can eliminate some biases from your decision-making. Once you commit to dollar-cost averaging, the strategy will make the decisions for you.
Dollar-cost averaging, of course, doesn’t completely mitigate risk. The idea is only to smooth the entry into the market so that the risk of bad timing is minimized. Dollar-cost averaging absolutely won’t guarantee a successful investment — other factors must be taken into consideration as well.
As we’ve discussed, timing the market is extremely difficult. Even the biggest trading veterans struggle to accurately read the market at times. As such, if you have dollar-cost averaged into a position, you might also need to consider your exit plan. That is, a trading strategy for getting out of the position.
Now, if you’ve determined a target price (or price range), this can be fairly straightforward. You, again, divide up your investment into equal chunks and start selling them once the market is closing in on the target. This way, you can mitigate the risk of not getting out at the right time. However, this is all completely up to your individual trading system.
Some people adopt a “buy and hold” strategy, where essentially the goal is to never sell, as the purchased assets are expected to continually appreciate over time. Take a look at the performance of the Dow Jones Industrial Average in the last century below.
Performance of the Dow Jones Industrial Average (DJIA) since 1915.
HOW TO DCA ON BINANCE?
What is Binance’s Recurring Buy?
Incorporating a Dollar-Cost Averaging (DCA) investment strategy, Recurring Buy allows you to choose the cryptocurrency you want to purchase, the amount you want to buy, and how often you would like to buy. Not only does it save time but it also saves you the stress of trying to time the market. Moreover, through using Recurring Buy you can reduce the impact of market volatility, lower risk of purchasing at a less than ideal timing, and steadily grow your crypto portfolio through long-term appreciation.
No matter how busy you get, Recurring Buy saves the hassle of making purchases manually over time by setting automatic cryptocurrency purchases. Keep on reading about the advantages of Recurring Buy and how to set yours up on Binance in five simple steps.
HOW TO SET UP YOUR RECURRING BUY IN 5 STEPS:
STEP 1: Choose Your Crypto & Enable Recurring Buy
Log in to your Binance account and tap on the [Credit/Debit Card] option on the app homepage. Next, choose the crypto you would like to purchase and enable the Recurring Buy feature on the same page.
For web users, simply tap on [Buy Crypto] on the top header of the homepage, and choose [Credit/Debit Card].
STEP 2: Select your preferred fiat currency
Choose from over 40+ fiat currencies and pick your preferred local currency.
STEP 3: Set up the frequency
Tap on the date on the same page, and choose between weekly, bi-weekly or monthly intervals. You can also select the day and time for your Recurring Buy.
STEP 4: Select your payment methods
We currently accept Visa or Mastercard payments. You can choose to use one of your existing cards or add a new card.
Note: You can only save up to 5 cards. If you want to add any additional cards, you will need to remove your existing cards first. In the event that the card is used for recurring buy, you will need to cancel your recurring buy plans to proceed.
STEP 5: Confirm your order details
Check and confirm your order details in one minute, as after one minute, the price and the amount of crypto you will get will be recalculated. Tap [Refresh] to see the latest market price. After you confirm your order details, you are all done. You can visit your order history to check the status of your recurring buy plan.
For a more detailed guide on Recurring Buy, check out Binance support article on How To Grow Your Crypto Portfolio with Recurring Buy
HOW TO USE RECURRING BUY ON BINANCE APP?
STEP 1:
Log in to your Binance account and tap [Credit/Debit Card] on the homepage.
STEP 2:
Tap [Enable] next to [Recurring Buy] to enable the feature.
STEP 3:
Select the fiat currency you want to use and the cryptocurrency you want to purchase.
STEP 4:
Tap on the date to set up the frequency of your recurring purchase from weekly, bi-weekly, and monthly. You can select the day and time for the recurring purchase, too. Tap [Confirm] to save your preference.
STEP 5:
Select your payment method. Tap [Change Card] to choose from your existing cards or add a new card.
5.1.To add a new card, tap [Pay with new card] and enter your card details.
5.2. To manage your existing cards, tap [Manage].
5.3. To remove a card, tap on the trash bin icon next to it.
You can only save up to 5 cards, and only Visa and Mastercard Credit/Debit cards are supported.
Please note that if the Credit/Debit card you want to remove is linked to any of your existing Recurring Buy plans, you will be prompted to cancel the plan first before you can remove the card.
You can tap [View Plans] to view your ongoing plans.
STEP 6:
You will see the order details. Check and tap [Confirm] within 1 minute. After 1 minute, the price and the amount of crypto you will get will be recalculated. You can tap [Refresh] to see the latest market price.
STEP 7:
You might be redirected to this page when we process your order. You can check your order status by tapping [View history] or [Refresh].
STEP 8:
Your purchase of the recurring buy plan is now completed.
If your Recurring Buy order fails, tap [Try again] to get a new quotation.
STEP 9:
You will see a new quotation. Tap [Accept New Quotation] within 1 minute, or [Cancel Payment] if you do not wish to make the purchase.
How to manage Recurring Buy on Binance App?
STEP 1:
To manage your Recurring Buy plans, tap the following icon.
STEP 2:
Select [Recurring Plan] to view all orders. Tap on the plan you would like to change.
STEP 3:
Tap [Manage].
To change your plan:
STEP 4.1.1.
You can change the frequency by tapping [Edit Frequency].
4.1.2. Check your new plan details and tap [Confirm].
4.1.3. Your recurring buy plan has been changed.
To stop your plan:
4.2.1. Tap [Stop] to stop the plan.
4.2.2. Once you tap [Confirm], your Recurring Buy plan will stop immediately.
HOW TO USE RECURRING BUY ON BINANCE WEBSITES?
STEP 1:
Log in to your Binance account and click [Buy Crypto] — [Debit/Credit Card].
STEP 2:
You will see the [Recurring Buy] option. Click to toggle on the button next to it to enable the feature.
STEP 3:
Select the fiat currency you want to use and the cryptocurrency you want to purchase.
STEP 4:
Click [Recurring Buy]. You can automate your crypto purchases weekly, bi-weekly, or monthly. You can select the day and time for the recurring purchase, too.
STEP 5:
To add a new card, click [Add New Card] and enter your card details.
Or you may use a different card by clicking [Change Card].
You will see a list of your saved cards. Click on the delete icon to remove the card.
You can only save up to 5 cards, and only Visa and Mastercard Credit/ Debit cards are supported.
Please note that if the Credit/ Debit card you want to remove is linked to any of your existing Recurring Buy plans, you will be prompted to cancel the plan first before you can remove the card.
STEP 6:
Once you have successfully added your Credit/ Debit card, click [Continue] to proceed.
STEP 7:
You will see the order details. Check and click [Confirm] within 1 minute. After 1 minute, the price and the amount of crypto you will get will be recalculated. You can click [Refresh] to see the latest market price.
STEP 8:
You might be redirected to this page when we process your order. You can check your order status by clicking [View history] or [Refresh].
STEP 9:
Once your Recurring Buy order is ready, you will be notified.
If your purchase failed, you can choose to [Accept New Quotation] based on the new quotation shown on the page, or click [Cancel Payment] to cancel the order.
How to manage Recurring Buy plans on Binance website?
STEP 1:
To view your Recurring Buy plans, go to [Orders] — [Buy Crypto History].
Please note that you won’t be able to edit or stop the Recurring Buy plans within 5 minutes before or after the order is processed.
STEP 2:
Click [View Plan] next to the Recurring Buy order you wish to change.
STEP 3:
Click [Manage].
STEP 4:
Here you can review or modify the frequency of the plan, or stop the plan completely.
To change your plan:
4.1 Choose the new plan details and click [Continue] to confirm the modification.
4.2. Please check the order details carefully before confirming your new Recurring Buy plan.
4.3. Verify your request with your 2FA devices.
To stop your plan:
4.4. Click [Stop Recurring Buy Plan].
4.5. Click [Confirm].
Please note that your recurring purchase will be stopped immediately.
CONCLUSION
Dollar-cost averaging is a redeemed strategy for entering into a position while minimizing the effects of volatility on the investment. It involves dividing up the investment into smaller chunks and buying at regular intervals.
The main benefit of using this strategy is the following. Timing the market is difficult, and those who don’t wish to actively keep track of the markets can still invest this way.
However, according to some skeptics, dollar-cost averaging can make some investors lose out on gains during bull markets. With that said, losing out on some gains isn’t the end of the world — dollar-cost averaging still can be a convenient investment strategy for many.
To get started click on the link below
