Dollar Cost Averaging (DCA) – Definition
Putting together money to invest into something maybe a stock, index or a cryptocurrency like Bitcoin, is sometimes difficult. To learn trading, we can use a strategy that allows an investor to put money without the effect of the volatility in the price of their target investment: Dollar Cost Averaging.
DCA is a strategy that allocates your money to be invested in a given stock/index/fund/cryptocurrency regularly over a given period. It is a strategy in which the amount to be invested is split into periodic purchases. These periods differ from weekly, bi-weekly, monthly, quarterly or annually. This scheme reduces the volatility in the total acquisition.
Putting a whole sum of money to purchase Bitcoin may not be a better move. For example, spending $58,000 today to buy Bitcoin does not guarantee an increase in the value. On the other hand, you can choose to spend $1,000 to buy parts of Bitcoin and in the event of rising and falling prices, the average after 5 months will be higher leading to a profitable endeavour : this is DCA. Human beings are mostly driven by emotions whenever money is involved. On this condition, many tend to make poor decisions for lack of a specific trading strategy.
Dollar Cost Averaging (DCA) – Advantages
Dollar Cost Averaging will ensure a purchase happens despite the current price of the share or stock to be invested in. Indeed DCA is a scheme that aims at accumulating certain shares or commodities over a long period. Dollar Cost Averaging eliminates the hustle of strict timing and knowledge when purchasing cryptocurrencies, shares or equities. It executes a buy whether the prices are high or low. Another key point is DCA usually assumes that prices will eventually increase.
An employee making a total of $10,000 a month may apply this strategy. He/she may choose to buy equities with 10% of their salary say Bitcoin. So what happens is, in every end month 10% of his salary will be used to buy Bitcoin no matter the current price. Dollar Cost Averaging (DCA) avoids the investor’s temptation to buy high and sell low. It keeps the investor in the market because buying of equities is not determined by how the prices look in the present.
Some investors may apply DCA even on cryptocurrencies they do not have information about. Under such circumstances Dollar Cost Averaging does not keep them from incurring loses when the cryptocurrency is losing. It is therefore worth noting, for safety in investing, individual cryptocurrency buying for companies one knows nothing about is risky as compared to indexes.
DCA – For who ?
Dollar Cost Averaging (DCA) keeps an investor from the greed to invest according to the market prices. It gives them discipline even when the market looks very lucrative. As prices rise and fall, the buy may be lower but if prices fall below the last price the investor accumulates shares from the previous purchase.
It is worth mentioning that the Dollar Cost Averaging can be used in buying cryptocurrencies like Bitcoin. Go for a broker or any platform where you can trade cryptocurrencies and then see if they have an automatic Dollar Cost Averaging option. Most platforms do not have so you will need to be buying manually. Taking Bitcoin as an example. If an investor had a Dollar Cost Averaging of $1000 per month in January 2020, how much are they worth now? That would be $15000 invested for 1.32437251 BTC acquired, so a value of $77,594.99. It is a 417.30% Return on Investment. You can use this simulator to calculate it.
Dollar Cost Averaging (DCA) is good for start-up investors and people who are not so much into business. It is can be a good retirement scheme for workers both civil and private. Although there are many advantages attached to Dollar Cost Averaging, it is worth noting that it is not a get rich quick scheme where you can just wake up and start. It requires that you take time and understand the value and habits of the specific stock or product you want to invest in before they dive in.
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In order to learn deeper the science of Trading, we recommend that you read our article on the best technical trading indicators to do Technical Analysis, or the one on the vocabulary of Trading, or to read how to become a trader for the copy trading by creating your own copy trading group for your friends/subscribers/community.
This article is not investment advice. Do your own research before investing in the cryptocurrency market.