In the cryptocurrency marketplace, prices can fluctuate even more wildly than in traditional markets, making it all the more important to have a strategy. Investors should plan their investments carefully and use strategies to minimize the amount of risk such a volatile market poses; dollar cost averaging is one such strategy.
Because we do not know what the price of an asset will be at any given point in the future, it can be quite risky to buy a large number of assets at once (the price could go down). Dollar cost averaging allows an investor to hedge price volatility by regularly putting an equal amount of money into an asset over a period of time; this way the investor does not have to worry about timing the market or buying in at a peak price.
For example, an investor who has decided to invest $1,200 into EOS, which has a current price of $10, could buy 120 EOS today. Or, the investor could decide to dollar cost average and invest $200 into EOS each month for the next six months:
At the end of the six-month period, our investor would have bought 130.7 EOS for a total of 1200, with an average cost of $9.18 each.
This strategy can be especially useful for those who do not have a large amount of starting capital and want to invest over time, such as applying a portion of each paycheck towards investments.
It can also be altered easily. One possible change is to increase the amount of funds invested when an asset has a low price, such as by investing $250 or $300 when EOS is at $9 or $8; this can further reduce the total average cost per asset. Another common alteration is to change the time period of investment from monthly to weekly and so on.
For another tip to hedge against price risk and volatility, read about the ladder strategy.