Dollar Cost Averaging (DCA) Meaning

May 5, 2023 | Updated Mar 18, 2024

Dollar Cost Averaging (DCA) is a strategy that involves investing a fixed amount in any asset like digital asset at regular intervals.

What is Dollar Cost Averaging In Crypto?

Dollar Cost Averaging (DCA) refers to regularly investing smaller, fixed amounts of money in a specific digital asset (i.e. purchasing $30 worth of Bitcoin every week).

With dollar cost averaging, investors buy a set amount of the asset over a period of time, rather than all at once. As a result, the investor buys a set unit of the assets regardless of the price of the asset being invested in. By entering the market gradually, the investor has the potential to purchase the asset at a lower overall cost than if they had bought a large amount of the asset in a single trade.

Here’s an example of dollar cost averaging:

Ogee and Gigi both intend to buy at least 1 BTC each. Let’s say that 1 Bitcoin is currently valued at $10,000. Ogee uses all his investment money to buy 1 BTC at the current price.

Gigi, on the other hand, decides to apply the dollar cost averaging technique and spreads the fund over 10 months, purchasing $1,000 worth of Bitcoin each month. For the first month, she purchases 0.1 BTC when Bitcoin retails at $10,000. Over the succeeding months, the price of 1 BTC goes from $10,000 to $8,000, $9,000, $6,000, $11,000, $7,000, $9,000, $12,000, $11,500, and $9,000, respectively.

Here’s how much BTC Gigi bought each month:

Month 1: $1,000 / $10,000 per BTC = 0.1 BTC
Month 2: $1,000 / $8,000 per BTC = 0.125 BTC
Month 3: $1,000 / $9,000 per BTC = 0.1111 BTC
Month 4: $1,000 / $6,000 per BTC = 0.1667 BTC
Month 5: $1,000 / $11,000 per BTC = 0.0909 BTC
Month 6: $1,000 / $7,000 per BTC = 0.1429 BTC
Month 7: $1,000 / $9,000 per BTC = 0.1111 BTC
Month 8: $1,000 / $12,000 per BTC = 0.0833 BTC
Month 9: $1,000 / $11,500 per BTC = 0.0869 BTC
Month 10: $1,000 / $9,000 per BTC = 0.1111 BTC

To find how much BTC Gigi had by the end of the tenth month, we add up all the purchases over the months:

0.1 BTC + 0.125 BTC + 0.1111 BTC + 0.1667 BTC + 0.0909 BTC + 0.1429 BTC + 0.1111 BTC + 0.0833 BTC + 0.0869 BTC + 0.1111 BTC = 1.0191 BTC

Dollar Cost Averaging Benefits

Risk reduction – By investing a fixed amount at regular intervals, DCA can help to smooth out the impact of market volatility on the overall portfolio.
Simplifies process – By setting up a process, it reduces the need to constantly monitor market movements and streamlines the investment process.
Helps avoid FOMO – Using DCA can help you stay disciplined and avoid making impulsive purchases, like FOMO-buying, which is common for new investors.