What is Dollar Cost Averaging?
The Beginner’s Guide
Dollar cost averaging (DCA) is a tool investors use for building wealth over time while minimizing the impact of short- and long-term volatility.
Put simply, investors use the DCA method to invest fixed amounts of money into an asset at regular time intervals, regardless of its price.
Most markets go through cycles where the price of an asset either increases (bull market) or decreases (bear market) over a certain period of time. While DCA investors may purchase fewer shares of that asset when the price is high, they will be able to purchase more when the price is low.
Investors may not always purchase the asset at its best possible price, but a DCA strategy removes much of the complex work that goes into attempting to time a market.
Dollar Cost Averaging Bitcoin & Crypto
DCA can prove particularly useful when investing in cryptocurrencies, a historically volatile asset class that trades 24/7 on the global markets.
For example, someone who dollar cost averaged into bitcoin by purchasing $5 weekly in 2020 would have accrued $692 from a $275 total investment, providing a 160% return.
Although this may not have yielded the highest profit, it protects against the possibility of investing at Bitcoin’s highest price point.
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Why Use Dollar Cost Averaging?
Investors may be drawn to dollar cost averaging as a “set it and forget it” practice for investing in asset classes they believe in over the long-term.
Due to the nature of using one’s hard earned cash for purchasing assets, investing can be a highly emotional practice. As a result, dollar cost averaging can help mitigate the reactivity and impulsivity that may happen from trying to time the market.