Dollar Cost Averaging

Beginner
March 29, 2023
Read time:
4m

Dollar Cost Averaging (DCA) is an investment strategy that involves investing a fixed amount of money regularly, regardless of the current asset's price. This strategy is popular among individual and beginner investors, as well as those who want to reduce investment risk to the greatest extent.


With DCA, an investor can purchase more of a given asset when prices are low and less when prices are high, for the same fixed amount (e.g., $100). This way, the associated risk is slightly lower, and the strategy contributes to the chances of long-term profit.


How does the DCA work?


The following example can describe the mechanism behind Dollar Cost Averaging:

Suppose an investor wants to invest $10,000 in cryptocurrency A.

Due to inexperience, lack of funds, or convenience, the investor decides to invest
$1,000 every month on payday. In ten months, the investor will reach the investment goal and have a portfolio in which asset "A" has been purchased at various prices.

Thus, the investor avoids purchasing at the worst market moments and achieves an average purchase price of asset A.


If the price of "A" rises, the investor could buy a smaller amount of "A" than the month before, but the value of the assets purchased earlier will increase. On the other hand, with decreases in the value of "A," the investor could still buy more units of crypto "A" at a lower price and equalize the average purchase price.


Summary

Dollar-cost averaging (DCA) is an investment strategy that involves investing a fixed amount of money at regular intervals, regardless of current market conditions. This way, investors can minimize the risk of buying at the worst market moment and achieve an average purchase price. However, note that DCA does not guarantee profits or protect against losses.

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