Dollar Cost Averaging or DCA is the process of spreading out a purchase of an investment over time.
DCA is a good strategy for a long-term investor, allowing the investor to ignore any short-term volatility.
DCA into an asset helps to lower the investor's risk and exposure to an asset.
What is Dollar Cost Averaging
Dollar Cost Averaging is an investment strategy, the strategy is to invest regularly over a long period of time, with the aim of having a better average cost compared to buying an investment in one lump sum.
A DCA strategy helps an investor to ignore any short-term volatility as the investment is over a long period of time.
In order to implement the strategy, you need to choose a cryptocurrency to invest in, such as Bitcoin, choose how regularly you invest, the total amount you wish to invest and the overall time frame you wish to invest over.
Regardless of the market price the investment is made regularly, on the same day each month for example.
At any stage, if the investor no longer wishes to invest, they can stop at any time.
DCA is a good strategy to reduce the average cost of purchasing an asset. DCA minimises the initial risk of an investment by spreading out the purchases, so you are not over-exposing yourself.
In times of market volatility and uncertainty, DCA can be seen as a safer method of investing.
Starting a DCA strategy does not have to involve a large starting capital; you can start with very little initial investment, which makes it a good strategy for beginners.
Depending on market conditions however, DCA is not always the best strategy to use when investing, if the asset gains in price significantly the investor can be left with less amounts of that cryptocurrency than if they just purchased in one lump sum.
DCA is a good strategy for first-time investors and experienced investors, the automated process allows an investor to keep purchasing an investment even if they don't have the time to watch the market and time their purchases.
Example of a Dollar Cost Averaging Strategy
Below we will use an example DCA strategy with a $1000 investment into Bitcoin over the course of a year.
You can view a DCA Bitcoin investment calculator that shows how a DCA strategy would have played out over a set period of time. One can be found here.
First, you need to determine how often you want to invest, a common approach is to invest on a weekly or monthly basis, in this example we will use a monthly investment strategy.
Divide your $1000 investment by the number of months you plan to invest over, if this is one year it would be 12. So $1000 / 12 = $83.33. This is the amount you will invest each month.
Choose your exchange, popular choices include Coinbase or Binance. Most exchanges will offer a recurring purchase option which automates your DCA plan making it easier to stick to; choose the specific day of the month you want the purchase to occur and set the investment amount, $83.33.
Throughout the year monitor the investment, it is a good idea to evaluate the performance of your investment, such as the average purchase price and the overall market performance, depending on your investment plans you can decide to continue implementing the same strategy or make adjustments.
Dollar Cost Averaging can be seen as a safe investment strategy for new and experienced investors.
The starting capital needed for DCA does not have to be a lot, allowing any investor to start an investment strategy.
DCA does not protect investors against the risk of declining market prices, as the strategy is over a long period of time there is an assumption that prices will ultimately rise.
Automatically setting up a DCA strategy through an exchange allows an investor to continually benefit from the strategy, without having to do much else except the initial set-up.
Want More Cutting-Edge Crypto News?
Sign up to our newsletter at the bottom of the page
This article is intended for educational purposes and is not financial advice.