DCA simply means scaling into a position. DCA is a strategy where one invest small amounts at regular intervals irrespective of the market condition (bull or bear). So, basically, DCA is an investment strategy in which an investor divides their total investment amount into regular, equal intervals over a period of time. In the context of cryptocurrency, this could mean buying a fixed amount of a specific crypto every week or month, rather than buying it all at once.
Let’s say it is 1st of January 2022 and you want to buy $1200 worth of Ethereum (ETH). You have two choice:
-
Buy $1200 worth of ETH at the current price, or
-
Break down this trade into 12 block trade of $100 each and buy them periodically each month for a year.
The second way is called dollar cost averaging. The logic behind this is simple. By not buying lump sum right away, you are protecting yourself from a potential downside and securing yourself a better average price per trade.
Advantages of DCA
One of the primary advantages of dollar cost averaging is that it can help to reduce the impact of volatility on an investment. Because an investor is buying their crypto at regular intervals, they are effectively averaging out the price that they pay for it. This can help to protect against the risk of purchasing at an inopportune time, just before the price takes a significant dip.
There is some evidence to suggest that dollar cost averaging can be an effective strategy in the crypto market. A study published in the Journal of Risk and Financial Management in 2018 found that dollar cost averaging performed better than a lump-sum investment in bitcoin over a three-year period. The study found that dollar cost averaging resulted in a compound annual growth rate of 29.83%, while a lump-sum investment had a compound annual growth rate of just 22.09%.
Disadvantages of DCA
One potential disadvantage of dollar cost averaging is that it can take longer for an investor to reach their desired level of exposure to a specific crypto. Because the investor is buying in smaller amounts at regular intervals, it may take them longer to accumulate a significant position. This can be particularly disadvantageous if the price of the crypto is rising rapidly and the investor would have been better off making a larger, lump-sum investment.
Another potential disadvantage is that dollar cost averaging requires a certain level of discipline and patience. An investor must be willing to stick to their investment plan and make regular purchases, even if the price of the crypto is falling. This can be difficult for some investors, especially if they become concerned about the value of their investment.
Despite these potential disadvantages, dollar cost averaging can be a useful strategy for investors who are looking to enter the crypto market but are concerned about the risk of volatility. It can be particularly useful for investors who do not have a large amount of capital to invest upfront and would prefer to invest smaller amounts at regular intervals.
Example of DCA
An example of dollar cost averaging in the crypto market might be an investor who decides to invest $500 per month in bitcoin. Rather than buying all $500 worth of bitcoin at once, the investor could divide their investment into four equal purchases of $125 each, made at weekly intervals. This would allow the investor to average out the price that they pay for their bitcoin and potentially reduce the impact of volatility.
Let us take an example of four tokens, i.e. Shiba Inu, Ethereum, Apix & Dogecoin, and analyse what would the return be if you would have invested in these tokens in the last cycle
If you would’ve invested $10 weekly from 1st Aug’20 to 11th June’22, the returns would look like:
-
Shiba Inu ( +2780160% )
-
Ethereum ( +42% )
-
Apix ( +548319% )
-
Dogecoin ( +534% )
Portfolio Returns are whooping +832000% OR +832K% ( Gas fee Not Included). This is the power of DCA
How to invest in DCA?
Step 1: Build a portfolio by researching about different tokens or by selecting a set of tokens. Example: Invest in just ETH or invest in set of tokens like ETH, BTC, MATIC, etc.
Step 2: Choose the amount you wish to invest and choose the interval (Daily, Weekly, Monthly, Quarterly, etc)
Step 3: Select a platform to start the DCA. One of the few project that will provide decentralised and secure DCA is DZap. You can choose to invest either manually by batch buying or automated DCA where DZAp does it all for you.
DZap will soon roll-out DCA feature. And this feature will be very useful for long term investors, retail investors or passive investors who wish to INVEST rather than TRADE. Follow DZap socials for more updates.
Conclusion
In conclusion, dollar cost averaging is a well-known investment strategy that can be effective in the crypto market. It can help to reduce the impact of volatility on an investment and may offer better returns than a lump-sum investment. However, it can also take longer to accumulate a significant position and requires discipline and patience from the investor. As with any investment strategy, it is important for investors to carefully consider their own goals and risk tolerance before deciding if dollar cost averaging is right for them.