DCA (Dollar-Cost Averaging) is a cost averaging strategy, also known as “price averaging”. Instead of investing all of your capital in one position, you will split your capital to enter multiple positions at different prices. This in the long run will help you reduce risk and stabilize your assets, especially in the Crypto market where there are very fast and strong fluctuations.
For example, you have a capital of $10,000 and want to invest in Bitcoin. Currently the Bitcoin price is at $40,000.
Case study 01: Not using a DCA strategy
You invest all your capital in Bitcoin at the market price of $40,000. At this point, you need to wait for the Bitcoin price to rise above $40,000 to make a profit.
|Average capital: $40,000|
Case 2: Using DCA strategy
Instead of spending the entire $10,000 to buy Bitcoin at $40,000, you can split your capital into 5 parts (e.g. $2,000 each).
Because the Bitcoin price fluctuates constantly, you can buy Bitcoin in many orders with the following prices in turn:
|Order turns||Capital||Bitcoin price|
|Average capital: $38,000|
Thus, instead of buying a single order at $40,000, you applied a DCA strategy to split the orders and buy Bitcoin at a lower cost. The average cost price is now pulled down to only $38,000. You just need to wait for the Bitcoin price to be higher than $38,000 to be profitable, instead of waiting for the Bitcoin price to rise above $40,000 like Case 1.
Note: This is just a hypothetical example for you to better understand the concept of DCA. DCA does not always yield a lower average cost as in the above example, but depends on many other factors: Market, entry time, greed and fear, investment goals,…
Practical applications of the DCA strategy
1. DCA to stabilize long-term buying price
You predict the long-term trend of an asset and break down the capital to enter multiple positions. For example, every day invest $100 in Bitcoin, with the belief that Bitcoin will grow strongly in the long term.
By using the DCA strategy, you don’t need to look for the best time to enter and still get a relative profit, as long as you identify the right long-term trend. Despite the elusive market volatility, you will still maintain a fairly stable cost of capital.
2. DCA to average the capital cost
Some random day, you just bought Bitcoin at a very high price compared to the current price (for example, you bought Bitcoin for $60,000 while Bitcoin is currently down to only $29,000). Now, instead of waiting too long for Bitcoin to return to your breakeven point at $60,000, you can use the DCA strategy: Buy more Bitcoin at $29,000 in the belief that Bitcoin will continue to grow in the long term. You can expect that this may help drag your cost lower, and you’ll be closer to breakeven.
However, DCA can also be a double-edged sword in these cases. For example, you accidentally bought a lot of token A at a high price and continuously DCA when the price fell. This causes you to continuously invest more money in token A and possibly lose your capital completely if project A goes out of business / encounters other risks. You also miss the opportunity to use that capital and time on more potential digital assets. So, be cautious when applying the DCA strategy.
Some final words
Above is an overview of DCA – a popular strategy in the investment market. The flexible use of this strategy helps investors reduce risks and stabilize cost prices. Wishing you an enjoyable investment experience with ONUS.