What is Dollar Cost Averaging (DCA)?
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Let's find out Dollar Cost Averaging (DCA) meaning, definition in crypto, what is Dollar Cost Averaging (DCA), and all other detailed facts.
Dollar Cost Averaging (DCA) is when you invest the same amounts of money every set amount of time, at regular intervals. It is believed that the term was first used by Benjamin Graham in a book he wrote called "The Intelligent Investor".
DCA is a well-known strategy among investors - not only crypto ones, mind you, but in general. They use it when they have a goal of avoiding risk exposure, as well as so that their investment would not be greatly affected by market volatility.
DCA can be both automatic as well as manual (depending on the platform of choice). It can also vary in time periods, amounts of money per investment, and other criteria - it's completely custom, and up to the individual to decide on.
Here is a simple example of a DCA:
Let’s say that two people who have different investment methods and profiles, Tom and Jane, invested in Ethereum. Tom has an idea to buy $300 of ETH every month until he has 1 ETH.
Date | ETH Purchased | Total ETH (sum) | Total Cost |
|---|---|---|---|
May 4 | 0.1309 | 0.1509 | $300 |
June 4 | 0.1499 | 0.3008 | $600 |
July 4 | 0.1702 | 0.451 | $900 |
August 4 | 0.2823 | 0.7333 | $1,200 |
September 4 | 0.1998 | 0.9331 | $1,500 |
October 4 | 0.1112 | 1.0443 | $1,800 |
He was able to get 1 ETH for a total price of $1,800 using this strategy. His strategy was very different since Jane just purchased one whole ETH that cost $2,300.
Date | Total ETH | Total Cost |
|---|---|---|
May 4 | 1 | $2,300 |
Jane got 1 ETH in May. In this case, she paid more than Tom. Her total investment cost was $2,300. This shows that investors might profit from using the DCA strategy. In this particular scenario, Jane paid more than Tom because she purchased one ETH immediately, rather than investing particular amounts for an extended period of time.
The reason behind creating the term itself is because of the demand to reduce the average cost of the total amount of assets bought.
In essence, the investor would be able to purchase a lesser piece of an asset for a higher price. Simultaneously, when the asset's price falls, more units are sold. As a result, the investor would enter a position progressively, rather than all at once.