Key Takeaways
- DCA, or dollar-cost averaging, is a popular investment strategy used in the crypto space, but it also applies to stocks and other assets as well.
- The core idea of DCA is to consistently invest a fixed amount of money into a particular cryptocurrency at regular intervals, regardless of the current price.
- You are essentially buying on both ups and downs, aiming to average out the cost per coin over time.
Did you know that dollar cost averaging (DCA) is the most effective way to deliver the best results in any market?
Let’s face it: most people are not good traders. Trading is tough, and so is investing. Still, trading is a lot harder. You need to know fundamental and technical analyses and have a trading/investing journal, as many emotions are involved.
Have no fear, though. Trading is not for everybody, and it is emotionally taxing. However, this article will explore the best investment strategy for beginner investors and how we can determine an amount and frequency we are comfortable with over time.
What Is Dollar Cost Averaging?
Dollar-cost averaging is when you decide on a certain amount of funds you would like to put towards an investment at a specific frequency.
| Month | DCA | Asset’s Trading Price | Total Quantity Purchased |
| Month 1 | $300 | $100 | 3 |
| Month 2 | $300 | $120 | 2.5 |
| Month 3 | $300 | $80 | 3.75 |
| Month 4 | $300 | $90 | 3.33 |
| Month 5 | $300 | $110 | 2.72 |
| Month 6 | $300 | $115 | 2.6 |
| Total | $1800 | — | 17.9 |
For example, you decide to start investing $100 into Bitcoin once per week every Monday morning. So, over a long period, you consistently invest in Bitcoin regardless of the price volatility.
You are averaging out your investments so that you buy into the asset over time without being affected by the highest or lowest points in price movement, rather than if you just invested in a lump sum.
How Much To Invest?
It is extremely important for a crypto investor to decide which projects to invest in over the long term. By long-term, we do not mean a few months or a year.
A common mistake newer investors make in the space is over-diversifying into too many projects, which can result in missed opportunities for potentially more significant gains over time. If you can swing it, putting 10% of your annual income into investment vehicles is a good rule of thumb.
Next, you must decide how much you want to invest in the cryptocurrency market. If you are younger and have many working years ahead, a larger percentage in these riskier asset classes is better than if you are closer to retiring and have limited to no steady income.
Frequency
Figure out the frequency you would like to invest (this can be daily, weekly, bi-weekly, or monthly). Remember that the higher the frequency your dollar cost average into something, the less exposure you will have to volatility. However, higher frequencies can also incur more fees depending on your exchange.
Cons Of DCA
The only downside of dollar cost averaging is that you do not get to dictate to the market what price you buy that particular asset; the market dictates to you.
However, many people like to do it for convenience and use the long-term strategy. If you know how to do it, it could pay off in the future.
How To Calculate Your Average Cost Basis?
For beginner investors, monitoring the average cost basis in a DCA strategy is recommended. This helps them assess the price levels the investment must reach to either recoup their initial capital (break-even) or realize a profit.
In the dataset above, we can compute the Average Cost Basis for a 6-month DCA strategy:
AVERAGE COST BASIS = $1800 / 17.9
Here,
- $1800 is your total DCA investment for the last 6 months.
- 17.9 is the total number of asset shares acquired.
Thus, your average cost basis is $100.56.
This means that your initial investment is at break-even when the asset price reaches or is at $100.56. Your unrealized profit will exceed the break-even price if the asset remains above $100.56.
Reminders
Anytime you invest in something, please make sure you are using disposable income. You are not supposed to use your food money, your mortgage, money for your rent, your bills, etcetera for investing; set your priorities straight before doing so.
Final Thoughts
DCA is a strategy that works very well for many people. If you plan to do this with memecoins, you will probably get wrecked because most of them will go to zero. Suppose you plan to do this with altcoins. In that case, your risks are much higher because there could be a lot of different issues that may happen. The team can rug pull, make poor financial decisions, or fail in their business, as most crypto companies are small businesses.
Dollar-cost averaging into Bitcoin, Ethereum, or even different types of traditional Investments is a good option for most people. Remember that there is never a sure way of investing, especially in the wild crypto market; even if you invest relatively safely, you still have no guarantee of a positive return.
