How Auto-Investment Strategies Work
Auto-investment tools are algorithms that execute trades automatically based on given parameters. Binance’s Auto-Investment tool is similar to DCA trading bot in that it also utilizes DCA strategy, but it offers a simpler approach to setting up investment strategy. On the other hand, DCA trading bots are more customizable and operate through certain trading rules such as rebalancing and price triggers.
Auto-Investment feature enables regular investments in specific cryptocurrencies regardless of current price. It is focused on periodic investments and additionally it also deposits the assets in Simple Earn Products Account to grow the crypto holdings. Once investors have acquired good amount of crypto, they can manually sell it at high price in the future to make profit.
By utilizing DCA (Dollar-Cost Averaging) strategy, this tool helps reduce the impact of price volatility on investment. Investors can use this tool to set up recurring investments and to grow their crypto holdings. Moreover, they can also diversify their investment to multiple cryptocurrencies.
Selecting the Right Coins
The DCA Auto-Investment strategy uses the principle to spread out the investments over regular intervals, which helps reduce risk of making large investment at unfavourable price. This strategy works well with cryptocurrencies having downward trends or volatile price movements. If you choose a coin with a long-term upward trend, this strategy may lead to acquiring crypto at each progressively higher price which may not give the best returns if you plan to sell out.
Cryptocurrencies such as BTC and ETH which experience weekly or monthly price downtrends or fluctuations, can be good for Auto-Investment plan because they have a history of regaining value, potentially leading to significant profits over time. On the other hand, newly launched cryptocurrencies, which lack historical performance data, are riskier as they have a higher potential to lose value in the long term without recovering.
Selecting the Right parameters
Binance provides multiple payment options for recurring investment plans including stablecoins and other crypto in your spot wallet or fiat currencies. When setting up DCA investment strategy, you need to select specific interval. This interval can range from minimum of 1-hour to maximum of monthly, allowing investors to spread out their investment over any timeframe they choose. You also specify the amount of crypto you want to purchase at each interval. By defining your risk tolerance and budget, you can better decide the appropriate amount for regular investments.
If you want to take advantage of short-term price movements, you might choose 4-hour interval which would make investment after every 4-hours. The Auto-Investment helps users constantly invest without having the stress of manual setup. This saves time and it also mitigates emotion-based decisions.
Portfolio Auto-Investment for Reducing Risks
Investing in single cryptocurrency, even through DCA strategy, can be risky if market does not recover after continuous price downfalls or if the investments are poorly timed. Diversifying to multiple cryptocurrencies can reduce this risk as some cryptocurrencies can perform better when others are underperforming. Moreover, Binance Auto-Investment’s ability to deposit assets in Simple Earn Products also helps grow your crypto which can give better returns.
You can either allocate specific percentages of your total investment to each crypto, ensuring your total allocation equals 100%, or use Portfolio Templates to finalize your investment plan. By doing this, you give a specific portion of your total investment to each cryptocurrency. You may give bigger allocations for those crypto, which based on technical analysis, may give better returns. But this requires you to analyse relative performance of cryptocurrencies using historical market data.
Concluding remarks
While Binance’s Auto-Investment feature does not offer full customization such as specifying limit price, or advanced parameters, it gives a simpler approach to using DCA strategy. Users can set a specific amount they want to invest regularly and also select a specific interval. Through this approach, users can acquire crypto by spreading out their investment to reduce impact of price volatility which is significant in case of lump sum investment. Moreover, the ability to allocate specific portion of your total investment to different cryptocurrencies, helps uniformly diversify your investment to several cryptocurrencies. Overall, this feature provides user-friendly approach to executing Dollar-Cost Averaging strategy.