Dollar Cost Averaging (DCA)

Dollar Cost Averaging is a strategy that aims to reduce the impact of volatility on asset purchases.

We’ve covered the DCA on our blog before, be sure to check it out.

How does it work?

Typically an investor might purchase a large amount of an asset a few times a year or once a month. This can lead to investors buying an asset at inopportune times where prices are higher than average. DCA breaks down what may normally have been a single larger purchase into multiple smaller purchases by buying small amounts of assets at random times around the clock. Such an approach helps users pay close to the average market price for an asset for any given time period.

Reduce Volatility

The impact of volatility can be reduced as dollar cost averaging buys frequently, thus an asset is normally purchased at both high and low prices. Over time, the price paid averages itself out and investors likely pay close to the average market price for an asset over a given time period. Buying an asset infrequently runs the risk of potentially buying at only higher than average prices over any given time period, leading to investors potentially incurring heavier losses.

Drawbacks?

Naturally, cryptocurrencies are notorious for being volatile assets anyway, and there is always a chance that one could perform a single large purchase—provided that a large lump sum is at hand—at a record low price. However, employing DCA is a sensible approach to investing that negates some risk of buying at inopportune times.