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EducationalJune 7, 2021

What is Dollar Cost Averaging (DCA)?

Shubham Goyal
Chief Business Officer
June 7, 2021

There exist a number of investment strategies which can be used by crypto traders and investors to make better decisions about directing their capital. One of the popular ones is the Dollar Cost Averaging or DCA. It is of significance as it assists in reducing the amount of volatility which comes with investing in assets like cryptocurrencies. A better understanding of DCA will enable investors to make superior decisions with their investments.

This article discusses what DCA investing entails, the benefits it provides as well as how it compares to some other popular forms of investing.

What exactly is Dollar Cost Averaging?

DCA investing entails taking up the entire pool of money which has to be invested and separating it into divisions. The strategy involves investing each of these divisions in increments. It is opposed to investing the whole chunk of money at the same time. The investments would be directed into the market at different time intervals. You can either make periodic purchases, or schedule the capital investment for certain time intervals.

This strategy prevents fluctuations in the crypto market from having a major effect on the entirety of one’s investment. A lot of times, when a large lump sum is invested into a market, it could be very susceptible to the highs as well as the lows. DCA in crypto specifically, is an effective way of manoeuvring the vagaries of the market.

DCA in crypto also prevents investors from directing their capital based on the ‘hype’ around a particular coin. The grounds of investing must solely be market research and ‘emotional investing’ can be prevented. In terms of overall risk mitigation, it is one of the better investment strategies.

What are the benefits of DCA investing in crypto?

It involves periodical investment of capital into the market. Due to the sums of money being introduced at timed intervals, it also decreases the overall average purchase price too. It is a method of investment which proves to be very helpful for someone who has just been introduced to the crypto market and is looking to make some nascent investments. Should one not have tremendous market research backing your investments, DCA would be a safe bet.

The strategy calls for avoiding severe losses on the basis of a single investment. It would also help your capital fare better during market crashes. The potential for risk is divided into smaller bits. This also leads to better risk absorption for the capital investments.

What are the pitfalls in this crypto investment strategy?

Some trading platforms might charge transaction fees at every interval of the investment. Another potential setback to this method is that one will miss out on capitalizing on the full expanse of a market high. DCA in crypto also calls for identifying the coin for investing very prudently, as it is a passive investment method. This is pertinent as it could cause you losses if one continues to make steady investments into a badly performing coin. Should the coin invested in, exhibit a state of prolonged decline, it would be detrimental to one’s overall investment portfolio.

How does DCA compare to other methods of investing?

DCA investing is contrary to another method of investment, the lump sum method. The lump sum method involves investment of the capital all at once instead of dividing it like the DCA method.

A drawback to DCA is that one might miss out on encashing on the popularity of when the marker experiences its highs. The lump sum will help you better capitalize on it. What one does gain when investing through DCA in crypto, however, is a level of safety which perhaps will not parallel that offered in the lump sum method. DCA investing also offers the benefit of being easy to comprehend and implement for nascent investors.

A study conducted by Vanguard studied the long-term impact of both these investment methods. It concluded that on a short-term basis, DCA investing would help ward off risks. But in a long-term investment plan, the lump sum method fared better.

Conclusively, DCA in crypto is a method which calls for more passive investing than active involvement with the changing market. It is recommended for those that have only recently gained entry into the crypto markets.

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