What is Dollar Cost Averaging?
Dollar Cost Averaging (also known as DCA) is a simple but effective investment strategy that involves making a series of small, recurring investments over a long period of time. DCA is an excellent investment strategy for volatile markets and makes is less risky compared to other investment strategies.
How does Dollar Cost Averaging work?
When you make small regular, investments over a long period, like if you were to buy $100 worth of Bitcoin each week, for example price fluctuations benefit you over the long term. When the price of Bitcoin is high, your $100 will buy you a small amount of Bitcoin. But when the price of Bitcoin is low, that same $100 investment will go much further.
A less risky way to invest
One of the most emotionally challenging aspects of investing in cryptocurrency or any other volatile market is the dramatic price swings.
For example, let’s say you invest $1,000 worth of Bitcoin all at once and prices suddenly drop by 50% overnight. If you decide to sell and take a loss, you will have lost $500. But if you had opted to spread that investment out into ten weekly $100 investments instead of invest all at once, then the same price drop would have resulted in a $50 loss. And if prices stay low, you will be able to buy twice as much Bitcoin as you ordinarily buy when it’s time to invest again.