What is Dollar Cost Averaging (DCA)?

What is Dollar Cost Averaging (DCA)

By Anycoin Direct

Dollar Cost Averaging (DCA) is an investment strategy where an investor puts in an equal amount each month when purchasing the same coin. In this lesson, we explain how DCA works.

✔️ Dollar Cost Averaging (DCA) is an investment strategy in which an investor regularly invests a fixed amount regardless of the current market price.

✔️ DCA results in building up an average investment price rather than depending on a single point of purchase.

✔️ DCA can be effective in dealing in cryptocurrencies for investors with limited experience or who have difficulty determining optimal purchase timing.

What is Dollar Cost Averaging (DCA)?

The terminology dollar cost averaging may already be familiar to you if you are into investing. For anyone who does not know exactly what it means, we have written this short lesson.

Dollar Cost Averaging (DCA) is an investment strategy in which an investor puts in an equal amount each month when purchasing the same coin.

Purchase moment

The return of with a one-time investment depends on 1 buying opportunity. With dollar cost averaging, you instead build up an average investment price. Despite different market conditions, you develop an average price for yourself at which you bought the shares.

This term comes from the investment world. Many investors there act out of emotion. There are also investors who don't do enough research or just don't know enough about it to make an educated guess as to whether it's a good time to buy in or not.

Average purchase price

For example, they invest a certain amount each month at the same price, so they buy high sometimes and low sometimes and over time average, expecting the market price of stocks to go up on average, which it does. The indices are higher every decade, with the occasional exception.

Sometimes these dollar cost averaging traders still use a bull market to eventually dispose of their shares at a high price, after which they just start this game all over again.

Dollar Cost Averaging (DCA) and cryptocurrency

If you trade crypto and you have too little experience to determine a good buying point or you make too many mistakes in trading, DCA can be a good strategy for you to get an average buying price.

For example, every month you can Bitcoin buy shares for 100 euros. Some months you will have bought high and some months low, but if you look at the max chart of Bitcoin on CoinGecko you will see that on average Bitcoin moves higher every 4 years. So this strategy will make your coins become worth more on average.

Then you have to eventually sell the coins at a good time, although you can also keep these coins until you reach a target or something. So it's a strategy that works with years, not shorter periods. 

Advantages and disadvantages of Dollar Cost Averaging (DCA)

Benefits of dollar cost averaging (DCA) are:

  • Trading without emotion. You never buy because you have an emotion like FOMO or FUD.

  • Knowledge not necessary. If you don't have the time to study yourself well then you can still trade crypto successfully with this strategy.

  • Simple. Sometimes on an exchange you can even set up a recurring purchase that makes automatic transactions.

  • Great profit opportunity. Even if you have little knowledge, over the long term your portfolio will still usually increase in value, as the price of a coin will rise over time. Bitcoin and Ethereum in particular are known for this so far.

  • Anyone can do it.

  • As an investor, you have lower average costs.

Disadvantages of dollar cost averaging (DCA) are:

  • Lower returns. Because you buy both high and low, the returns are much lower than if you only buy low and sell high.

  • You can still lose money. You still have to determine when to sell a coin, and during that time the coin may have taken a loss.

  • There are many smarter strategies possible in the crypto world, such as buying low and selling high. For that, though, you have to do research.

Is Dollar Cost Averaging (DCA) a good strategy?

Yes. If you don't have the time or inclination to learn about cryptocurrency, you can still make a profit with this strategy. All you need to know is when to sell.

Obviously, there are other strategies that work better. However, you have to do some research for that. In the basics of trading, it's always good to know what a low buying price is for a coin relative to its average high in a bull market. That way you can make a profit if you buy in at that time. This is simply buy low sell high. To do this, you can get the cycles of a cryptocurrency from websites like CoinGecko, for example.

But again, this obviously takes some effort. By comparison, the Dollar Cost Averaging method is the easiest and safest method.

Test your knowledge

Question: 1/5Where did the terminology Dollar Cost Averaging originally come from?
AFrom the investment world
BFrom the crypto world
CFrom the gambling world
DFrom the real estate world