Dollar cost averaging (DCA) is when someone invests fixed amounts (such as $20) at regular intervals (every week). This is a strategy used by investors that wish to reduce the influence of volatility over their investment.
As a result, the investor would be purchasing less of an asset while the prices are high and more of an asset while the prices are low.
The name “dollar cost averaging” is because the strategy opens the potential for reducing the average cost of the total amount of assets purchased.
Let’s look at an example of how dollar cost averaging may work:
On the first of January, Alice and Bob decide they wish to invest in Bitcoin. Bob and Alice have different investment strategies
Bob wishes to purchase $500 of BTC each week until he accumulates one entire bitcoin.
|USING DCA STRATEGY|
January 01, 2018
January 08, 2018
January 15, 2018
April 23, 2018
April 30, 2018
May 07, 2018
Bob managed to accumulate one BTC for a total price of $9500 over time by investing $500 each week regardless of the price volatility.
Alice, on the other hand, believes it’s better to purchase one whole bitcoin at once.
|NOT USING DCA STRATEGY|
January 1, 2018
Alice purchased one BTC on the 1st of January, it cost $14,200. In this scenario, Alice has paid significantly more than Bob, by purchasing one BTC all at once.
Dollar cost averaging is a long term strategy used to reduce the effect of the overall price volatility of an asset when investing.