A basic investment strategy to get shielded from price volatility — DCA

What you need to know

  • DCA is a strategy to hedge against volatility by spreading buys out over time.
  • DCA is meant to remove the emotional side of investing by providing a patient, methodical approach.
  • DCA works best over a long time period but results aren’t guaranteed.
  • DCA is a good strategy for beginners or users seeking to invest with a smaller amount of funds.

The Strategy

DCA bases itself on a simple principle: cryptocurrency markets are notoriously volatile and timing them is extremely hard. Choosing a good entry and exit point, in other words, having good timing when exercising a buy or a sell, takes a lot of skill (or a lot of luck). This is no secret, it’s widely known that day traders (a term for investors who trade short-term movements in price) are mostly unsuccessful. Studies have shown that only around 5–20% of people who day trade end up being profitable. Almost everyone thinks they have a better understanding of the market but not many actually do. DCA (dollar-cost averaging) is a way around this.

How it works

Let’s break down how DCA works by using an example (I’m going to use big round numbers to keep things simple). Say two friends, Juan and Pedro, each has $1,200 dollars to invest in Bitcoin. Let’s assume that today the price of Bitcoin is $50,000. Juan buys $1,200 at once and has .024 Bitcoin. Pedro decides to split his purchase into $100 per month, buying on the first of each month for the entire year. He commits to always buying regardless of what the price is. Let’s look at how Pedro’s purchases may look.

  • In Jan, $100 at $50,000 = .0020 BTC
  • In Feb, $100 at $60,000 = .0017 BTC
  • In Mar, $100 at $65,000 = .0015 BTC
  • In Apr, $100 at $50,000 = .0020 BTC
  • In May, $100 at $40,000 = .0025 BTC
  • In Jun, $100 at $35,000 = .0029 BTC
  • In Jul, $100 at $40,000 = .0025 BTC
  • In Aug, $100 at $30,000 = .0033 BTC
  • In Sep, $100 at $35,000 = .0029 BTC
  • In Oct, $100 at $40,000 = .0025 BTC
  • In Nov, $100 at $45,000 = .0022 BTC
  • In Dec, $100 at $50,000 = .0020 BTC
  • $1,200 at $45,000 avg. = .028 BTC total

The Pros and Cons

As with any investment strategy, DCA has both pros and cons. You may have noticed that in the price examples in the table above, many months were spent at a lower price than the initial start of the experiment. This isn’t always the case. You can imagine a scenario where the price of Bitcoin, instead of dropping, has a great run and rises dramatically. In this scenario, DCA will get you a smaller amount of BTC than if you would have purchased it all at once.

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Icaro Moro

Crypto enthusiast and philosophy-head. Into pragmatism, craftsmanship, artistic expression, and lifestyle experimentation.