DCA Explained Simply
All about dollar-cost averaging (DCA) in a compact article.
Perhaps you have already heard about DCA, dollar-cost averaging, but are unsure what exactly it is and how should you use it. Or even more importantly so, should you use it? In this article, I aim to answer those exact questions so you can then decide if DCA is something for you or not.
Dollar-cost Averaging
Simply put, DCA is an investment tool, used not only in the area of cryptocurrencies but also stocks, funds, 401k and more. It is generally regarded as one of the essentials for investing beginners due to its simplicity and effectivity.
DCA is a practice of systematically investing equal amounts of money, in set time intervals, into an asset. For example, you could create a DCA plan that you will buy 50$ worth of BTC every week, on Sunday, at 8:00.
Now, why would you do something like this?
The goal of the strategy is to minimize the impact of volatility on the overall price of the asset. As you purchase the asset periodically, over time, the prices of each purchase vary, but also average on (hopefully) lower price than is the current market price. Of course, there is a prerequisite: in order for DCA to be an overall profitable strategy, you have to pick an asset that increases in price over time. The strategy won’t work, if the asset’s price is constantly going lower and lower. DCA can protect you against short term dumps, but the overall trend of the asset has to be upwards (unless, of course, you are shorting — then the condition is reversed).
One of the reasons dollar-cost averaging is recommended for beginners is that it prevents impulsive purchases, especially the type of “all-in into a hype coin that then crashes and I lose all my funds” (we have all been there). It replaces emotion-based, impulsive behaviour with solid, sound, proven strategy that has been around for many decades.
Your most important decision is the choice of the asset (in crypto, of the token) you want to invest in. The most useful tool for this task is fundamental analysis, which you can read about in one of my previous articles:
But to put it simply: DYOR! (Do your own research!)
DCA Bots
Today, especially in cryptocurrency sphere, there exist many bots for most common investing/trading strategies and DCA is no exception.
DCA bots are what you would expect: you make a plan of periodical purchases, choose your asset, amount of funds spent on each purchase, frequency of the purchases and then start the bot. It will then do all the work for you and as long as you have funds, it will continue to regularly invest. Sometimes, the platforms/bots even offer insightful analytics of your overall investment, which can be useful as well, in case you for example don’t want to calculate your ROI manually.
