Dollar-Cost Averaging (DCA)

Published 21 September 2022
Dollar-Cost Averaging (DCA)


There are a wide variety of strategies with different investing risk levels. Dollar-cost averaging, also known as DCA, is one of the most well-known. This approach supposes systematic asset buying, ultimately eliminating the necessity of market monitoring. Seems too difficult? Keep reading and learn how to implement it in your crypto investment approach effectively.

So, let’s start by answering the question: «What is DCA?».

What is dollar cost averaging

Contrary to the one-time investment, dollar-cost averaging suppose you invest specific sums regularly. Using this approach, you make operations with the pre-defined dollar-cost averaging frequency despite the asset cost or market fluctuations. The DCA strategy is prevalent among investors who want to profit from certain assets from a long-term perspective.

Entering the market allows you to decrease the asset’s volatility level compared to a one-moment payment. Why is that? Regular buying will enable you to smooth out the average price. In the long run, this strategy reduces your investment’s negative impact.

Have you decided to stick to this strategy? Then you must choose how much cryptocurrency you want to invest. In the conventional approach, you invest the entire amount in a particular asset. With the DCA crypto strategy, you invest fixed amounts of USD or other currency in the selected asset over time.

For example, you can invest $15 in BTC, purchasing weekly for a year. When using DCA, it is essential to decide on cryptocurrency. Now there are about 12 000 cryptocurrencies in the world. The dollar-cost averaging strategy has been around for a long time, so you need to pick the right coin that will appreciate and make you a profit.

Now that we have figured out the DCA meaning, it’s time to move on to how it works and why you should seriously consider using this strategy.

How to DCA crypto

Dollar-cost averaging cryptocurrency strategy helps eliminate the need for accurate forecasts of the future price movement. As even if everything points, for example, to a price increase, it is far from certain that the growth will occur. Thus, it may turn out that the wrong time was determined to enter the asset.

Therefore, in some way, the DCA strategy will pre-determine all your future steps, removing the extra burden present when making an important decision. Of course, all risks will not be eliminated, but the moment of entering the market will be smoother.

Having an average dollar value when you enter a position, you will also need to consider an exit plan, that is, a trading strategy that determines the conditions for closing your positions. Having identified comfortable exit points, you sell those parts of the funds deposited in the asset that are approaching the targets, thus reducing the risks of staying in the position while you need to take profits. However, the moment depends on your trading strategy.

There is a category of people whose strategy is to «hold» long-term retention of acquired assets, as they are counting on a constant increase in the price of these assets in the long term.

It’s time to overview the investment DCA strategy on some examples. Let’s take a situation where a bear market begins, and we do not yet see the prospect of an uptrend. We decide to invest $1000 monthly in BTC over the past six months, here’s what our investment would look like:

Date BTC price Quantity bought
March 2022 47 459 0,021
April 2022 38 650 0,026
May 2022 29 942 0,033
June 2022 20 108 0,049
July 2022 23 847 0,042
August 2022 20 308 0,049

At its six-month high in March, for $1000 you will only buy 0.021 BTC. However, during the June low, you will be able to buy 0,049 BTC for the same price. In the end of the period, we could have 0,22 BTC.

At the same time, you could invest all your $6000 once in March and get only 0,126 as it’s bear market. But although you could buy BTC in June for all your money and get 0,298 BTC.

As you see, the DCA strategy significantly reduces risks to lose.

Dollar-cost averaging calculator

There are some particular apps to count dollar-cost averaging — the so-called DCA calculator. To define dollar cost averaging, you need to specify several things, like the final sum of funds to invest, time, and payment intervals. With the help of this information, the DCA calculator crypto will give you an idea of how you can implement different strategies.

Now, let’s move on to the examples of calculating dollar-cost averaging. Let’s say it’s January 2020, we have $2650 and a desire to buy BTC. But instead of investing the whole amount at once, we decided to invest $50 weekly for a year. This is what your earnings would look like after the indicated time:

The green line is the amount we have invested, the orange one is the BTC price change. As you can see, over the year, $2650 turned into $7719 thanks to a growth rate of 191.29%.

Pros and cons of dollar-cost averaging

Like any other strategy, the cryptocurrency DCA strategy has its benefits and drawbacks. Before choosing it, you need to consider a few things.

Let’s start with the advantages of dollar cost averaging.

  • You purchase crypto regularly, so you are not in danger of losing funds from an ill-conceived investment.
  • You are not afraid of missing out on opportunities and won’t make impulsive investment decisions, meaning you won’t have to worry about price fluctuations.
  • Besides, the DCA crypto strategy does not require huge investments. This strategy involves small and constant purchases, so you do not have to think about how best to spend a considerable amount at once.

Sure, there are also some disadvantages of dollar cost averaging.

  • You can buy assets at a higher price if the rate rises on the day of your purchase. It is essential to consider when your chosen cryptocurrency is bullish.
  • Investing in small sums means that you will buy cryptocurrency shares, whether the market is stable or not.

Wrapping up

DCA is a well-known approach that allows you to enter the market, minimizing the volatility impact. DCA involves the division of investments into equal parts and the buying of cryptocurrency regularly.

One of the main dollar cost averaging benefits is that selecting the right time to invest is rather tricky, and those who do not want to follow trends actively can invest in the way mentioned earlier.

So is a dollar-cost averaging strategy worth trying? As usual, we recommend you study all the possible information, use the DCA investment calculator to select the best option, and only then make a decision.

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The idea is pretty straightforward. You should invest a constant sum of money in the same asset regularly.

This approach suits the ones who prefer low-risk investments. According to the DCA investing approach, you don’t make spontaneous decisions. As an alternative, you invest small sums regularly.

Let's imagine you invest $50 weekly. When the market is in a bear trend, you can buy less, but your money can buy more when the market is bullish. Eventually, the dollar-cost averaging crypto strategy can lower an asset's average price.

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