Dollar Cost Averaging: What you weren't told.
You’ve been told to keep throwing in more money on your crashing asset to reduce the average purchase price. Saylor bought over 20k bitcoins at an average price of about $34,000. Considering the difference between the highest and lowest prices he bought them; that’s a long journey and a whole lot of Dollar Cost Averaging (DCA). Dollar Cost Averaging?
What does that even mean? Well, if you have the habit of buying more of a particular asset even as its price keeps falling down the cliff, then you’re DCAing, without even knowing the general term for what you are doing. Majority of cryptocurrency investors do this a lot, myself too. A pure show of belief and dedication…or just greed.
Even your favourite twitter influencer told you at least once to “fill your bags at these prices”. Even as the price continues to go lower, you still keep filling ‘those bags’. DCAing and hoping for better days. Sometimes they come, other times…well, bagholding is also part of the game. If you are an active DeFi participant or a meme token connoisseur, you probably have tons of tokens you might never sell again. You kept buying down the mole hill and now there is no way back up the dark pits. It happens.
The advice to keep buying the dip and HODLing is a popular one, but there’s something you’re not being told…yet.
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In a space filled with thousands of projects claiming superiority, it is easy to lure investors with well-crafted promotional pieces. Everything running down to why you should invest and continue doing that even when it all looks dark; or at least hold on to your investments and not exit the market even when you’re in gains. Influencers use bold words and appear as more experienced than the larger majority; sometimes they really are. Other times, they are simply putting out their personal opinions and perceptions. This space still remains the most unpredictable investment option.
Main factors guiding your choices should be your personal convictions through detailed research and experience. External suggestions are only resources to help your research process and shouldn’t form the main basis for your decision.
That being said, Dollar Cost Averaging is a brilliant move…when done right. Getting it right isn’t a mathematical issue too. But consider these…
Before buying more of a crashing asset, questioning the reasons for the loss in value might be important to your decision. Getting greedy when others are fearful is unarguably a good move, but sometimes this could also backfire; in reality, this move is always risky. Taking time to make certain considerations before ‘getting greedy’ increases your chances of averting some disasters. Price may dip badly in cases of irregular acts by the team behind the project you are invested in, this always drive the price nuts and could possibly dip to its least point. I mean, the team is gone! Lol.
If a crash isn’t due to some extreme reason which affects only the project then there are chances of making a recovery. Pulling a recovery depends on two factors; the project making the right moves and the market reacting positively to its move. Recovery cannot happen without these two factors being met satisfactorily.
Taking a good at the team behind the project and their reaction towards the dip is surely an important move to make. How the team is reacting to the drop in value of their project and how do they hope to get out of the ditch. In a situation where the team already ‘exit scammed’ then this might not be possible. ”Almost impossible” is a better way to put it. Well, ‘impossibility’ is an illusion in space. But if a project team is gone for real, a recovery is far-fetched.
Alright, there are chances for a recovery; but to what extent? Certainly, if a project is determined to keep working harder after a huge price drop, it is poised to pullback some losses, sometimes the pullback is no relative to the drop. For a project which experienced a 70% price drop, making a 70% gain from their current position still keeps them below their former top level. This is an indication of the extent a project needs to go before a complete recovery. Well, sometimes it is easier to go up from the bottom.
While DCA is plausible and you’ve been advised to invest what you can lose; considering some or all of these also goes a long way to reducing your potential losses…at least.
Nowadays, DCA isn’t the only cryptocurrency investment strategy. Although a lot of online sites publish educational cryptocurrency contents, Newscrypto academy offers an incomparable and perfect resources for beginners and advanced traders. Sign up on NewsCrypto for free and improve your cryptocurrency knowledge and skill.
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You need to stay up to date on projects, without fundamental analysis and constant ADJUSTMENT of DCA strategy is a mediocre strategy at best, and at worst a money-losing strategy. Even just adding a simply rule like "dont buy/only buy 1/2 normal amount if the asset increased over x% on the week, and buy 2x if asset lost x% (except for catastrophic events that will cause the price to keep falling etc)" or "buy under x price, stop buying once it reaches y price" is a HUGE improvement. Just DCA alone is not a very good strategy, but if a person insists on it, they should only stick with BTC/ETH.
But generally speaking, this is crypto, you need to actually know what you're doing or else your chances of getting rekt is high.
Never invest in something you do not understand.
Chances of getting rekt persists, even when you're knowledgeable about the project. It's a wild west and researching only improves your chances of getting it right. it's however, very important to take some time and do your research before doubling down on your investments. Thanks for taking time to read!
Yes you are right of course, the chances of getting rekt are indeed always present even if you are a full time investor. The best we can do is to educate ourselves and perform due diligence on investments we plan to make so that we can make the best possible decision based on incomplete information, and with many factors out of our control. Kinda like poker: there is indeed luck in the game and you can never know 100% if your decision is correct (and sometimes correct decisions you still get unlucky and lose), but in the long term even with the luck factor, the pros' profits absolutely blow the guys that win due to pure luck out of the water. Same thing with investing. On average, of course, there are the 0.00001% of guys that get rich due to more or less winning the lottery so to speak. Now and then you will get someone random with no brain that has zero strategy like the DOGEcoin millionaire that buys pure trash and gets lucky, but we can see what happened to him afterwards where he went from $3.6M down to around $450k, because people that have no clue what they are doing are usually terrible with managing money. Same reason why most lottery winners go broke within a few years, when they literally could have just printed free money for their entire family for the rest of their lives from the interest, if they just put it into index funds and/or stablecoin DeFi platforms paying 8-14%+ APR. Its a shame that more folks do not take the time to educate themselves...as shocking as it is, in fact MOST investors are completely reckless and have no clue what they are even buying, and that goes doubly for crypto since it is much more complicated than stocks and bonds.
And thank you too, great post!