Dollar Cost Averaging Meaning
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.