Dollar Cost Averaging, often abbreviated as DCA, is an investment strategy involving intermittent investment in a particular type of asset. This minimizes the risk of volatility. An investment is thus broken up into smaller parts.
The main premise of the DCA method is that the investment is less affected by volatility this way than with a one-time deposit. By buying the asset regularly, the average price can be smoothed out.
In the long run, such a strategy reduces the negative impact that an entry can have on an investment.
When selling an asset, the same strategy is used. The investment is divided into small parts and sold as soon as the market approaches the target. In this way, the risk of assets being sold at a bad price is reduced.
An advantage of this strategy is that sudden price changes do not have a large negative effect on profits. This is because an average price is taken when buying and selling. A disadvantage, in turn, is that positive effects do not have a large effect either.
Others follow a "buy and hold" strategy, where the basic goal is to never sell, since the assets purchased are expected to rise continuously over time. With an asset class like gold, for example, this has proven to be an excellent strategy.
Although there have been brief periods of decline, the gold price is on a continuous upward trend. The goal of a buy and hold strategy is to enter the market and stay in the position long enough so that timing does not matter.
It is important to keep in mind that such a strategy is usually focused on the stock or commodity market and may not always be applicable to cryptocurrency markets.
Everything becomes clearer using an example, in our example we have an amount of €10,000 to invest. We want to invest it in bitcoin (BTC) but we think the price will vary in the upcoming period. So it may be beneficial to build our investment position using the DCA strategy.
We could divide the €10,000 into 100 pieces of €100. Each day we are going to buy €100 worth of bitcoin, regardless of the price at the time. This way we are going to spread our total investment over a period of about three months.
Another situation could be when bitcoin has entered a bear market where the price is low and we do not expect a rise for the time being. The market will slowly build up over time according to our expectation, so a good time to build up our position. We are using a slightly different strategy now, we have a longer time to cover. We divide our €10,000 in this case over 12 months
We could again divide the investment into 100 parts of €100. However, this time we are going to buy €100 worth of Bitcoin every week instead of every day. There are about 52 weeks in a year, so the entire strategy will be implemented in just under two years.
In this way, we build a long-term position while the downtrend runs its course. We won't miss the train when the uptrend starts, and we've also mitigated some of the risks of buying a downtrend.
