What is dollar cost average (DCA) and why is it important?
Or why every Youtuber out there thinks this is the one of best strategy to start from!
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🍳 SCRAMBLED EGGS: Dollar-cost average
DOLLAR-COST AVERAGE
First things first.
What is Dollar Cost Average (DCA)?
It’s an investment strategy. Basically, it looks like this: you have some assets you want to invest. And, instead of investing everything at once, you DIVIDE those assets. And then you invest periodically. Why? To reduce the impact of volatility in the market on the overall purchase.
This actually eases the whole process of investment. Because you don’t have to constantly monitor the market in order to make purchases at the best prices.
In other words, DCA is known as a constant dollar plan. Or a tool to build savings over a long period of time.
What else is important?
DCA works best only for assets that rise in value over time (so Bitcoin could be an example of such an asset). That’s when DCA can improve the performance of an investment in the long term;
The idea of a constant dollar plan assumes that prices in the market possibly will go up (eventually); however, this strategy cannot eliminate the risk of dropping market prices;
It is important to understand the details of the company you’re going to invest in; otherwise, it could be dangerous, because inexperienced investors (I like to call them newbies) can make mistakes and buy too many stocks, etc.;
Price is not equal to value - price contains demand and supply; when demand is low and supply is rising, the price falls. When demand is high but supply is low, prices rise up. Basics.
Prices consist of non-fundamental and fundamental factors affecting supply and demand, as well as psychological elements (basically how investors feel about their fundamentals and if they value them); long story short, prices always represent investors’ expectations, momentary agreement of value among sellers, buyers and traders on transaction moment;
Prices are constantly changing and swinging because of intensity of fear and greed index between buyers and sellers;
Arbitrage is limited. So it means that investors may not want to trade against securities’ overvaluation, which makes overvaluation carry more on than underpricing. That causes short-term market incapability;
No one knows if we have an effective market in crypto. At least yet.
DCA could be helpful in crypto, if your chosen asset (coin/project) has intrinsic value and if the market is effective for a long period of time, as I’ve mentioned before; and since we don’t know what to expect in the future, well, it’s just risky. So always keep that in mind.
What steps should you take for starting DCA?
Create your investment strategy → understand risks in short and long-term investments (DO YOUR OWN RESEARCH!) → check if the project you’re interested in has intrinsic value → build up your portfolio → learn and understand how the crypto market works → follow crypto investors and always seek out for their insights → GOOD LUCK!
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Disclaimer: This newsletter is strictly educational. None of this information is intended to be financial advice. Always do your own research and act responsibly with your profits.