Dollar Cost Averaging, often abbreviated as DCA, is an investment strategy that involves intermittent investments in a certain type of asset. This minimizes the risk of volatility. In this way, an investment is divided into smaller parts.
The main starting point of the DCA method is that this way, the investment is less affected by volatility than with a one-off investment. By buying the asset regularly, the average price can be smoothed out.
In the long term, such a strategy reduces the negative impact that an entry into an investment can have.
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. This reduces the risk of assets being sold at a bad price.
An advantage of this strategy is that sudden price changes do not have a major negative effect on profits. This is because an average price is taken when buying and selling. A disadvantage, on the other hand, is that positive effects do not have a major effect either.
Others follow a “buy and hold” strategy, where the goal is basically never to sell, as purchased assets 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 short periods of decline, the gold price is continuing to trend upward. The goal of a buy & hold strategy is to enter the market and stay in position long enough that timing doesn't matter.
It's important to note that such a strategy usually focuses on the stock market or commodity market and may not always apply to the cryptocurrency markets.
Everything becomes clearer with 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 coming period. It can therefore be beneficial to build our investment position through the DCA strategy.
We could divide the €10,000 into 100 pieces of €100. We're going to buy €100 worth of bitcoin every day, regardless of the price at that time. In this way, we will spread our total investment over a period of approximately three months.
Another situation may be when bitcoin has entered a bear market where the price is low and we do not expect an increase for the time being. Over time, the market will slowly build up according to our expectations, so it's a good time to build our position. We are now using a slightly different strategy, we have a longer time to overcome. In this case, we distribute our €10,000 over 12 months
We could again divide the investment into 100 parts of €100. This time, however, we're going to buy €100 worth of Bitcoin each week instead of every day. There are approximately 52 weeks in a year, so the entire strategy will be executed in just under two years.
In this way, we build a long-term position while the downward trend takes 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.
