What is Dollar Cost Averaging (DCA)?
Active investing and trading can be mentally demanding and time consuming. Plus, you don’t even have a guarantee that the time you have to devote to it will lead to success. Fortunately, there are also other passive ways of investing and trading without having to be constantly involved. An excellent example of this is Dollar Cost Averaging (DCA). So, what is Dollar Cost Averaging? You will learn everything about DCA in this article.
What is the Dollar Cost Averaging Strategy?
In addition to our automated trading solution, there are other strategies to passively build a long-term portfolio. An example of this is the Dollar-Cost Averaging (DCA) strategy. With a DCA strategy, you build positions by regularly investing an amount of money, regardless of the price of the asset. Investing money regularly can be done at intervals of weeks, months or even years.
The idea behind this strategy is that when prices are high, you as an investor can only afford a limited amount of assets, such as Bitcoin. However, when prices fall, you can buy more Bitcoins. When the market recovers, you can benefit from buying more Bitcoins at a lower price.
You can fill up your car at the gas station for €50 every week. You notice that one week you can drive more kilometers with the tank than the other weeks. That’s because the liter prices of gasoline change every day. One week you fill up 26 liters of petrol for €50, the next week you fill up 30 liters for €50. The lower the liter quantity, the more liters you can fill with €50, which ultimately lowers the average fuel price. You use the same principle with the Dollar Cost Average.
Why should you use Dollar Cost Averaging?
With Dollar-Cost Averaging you reduce the risk of bad timing for your investment. Timing an investment is one of the most difficult aspects of investing. You also often hear that people wait for the price to fall before buying, even if they have no assurance that the price will go lower. Dollar-Cost Averaging helps in this process to reduce risk.
Dividing your initial investment into smaller chunks gives you several opportunities to buy at a better price than if you invested all your money in one go. It’s a shame to invest all your money in one price, only to see the price drop even further. That is why it is good to apply the Dollar-Cost Averaging strategy, so that you can also buy at a lower point.
In addition, the Dollar-Cost Averaging strategy also ensures that you do not have to constantly worry about the price because the strategy makes the decisions for you. Instead, you buy at set times, regardless of what the price is at that time.
Calculate the Return on Dollar Cost Averaging
On the website dcabtc.com you can calculate what the Dollar-Cost Averaging strategy would have paid you if you had done it consistently for the past six months or more.
In the chart below you can see what the strategy would have given you if you had invested €20 in Bitcoin every week for the past four years. After four years you would have invested €4,180 and your Bitcoins are now worth €36,000. That is the strength of this strategy. Whether at a high point, such as in the bull run in 2017, or at a low point, such as in the bear market during 2019, you are buying regardless of price.
Source: dcabtc.com / Return on investment after buying €20 worth of Bitcoin every week for a period of 4 years. Total invested: € 4180 // Total value: € 36,000
Dollar-Cost Averaging is an excellent method if you do not want to be constantly concerned with the price and want to spread your risk. Instead, you cut your initial investment into smaller chunks and buy your assets regardless of price. The advantage of this method is that you don’t have to time the market, but stick to fixed dates to buy.
For many investors, the DCA strategy is the best strategy for passively building a portfolio.
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