Dollar Cost Average (DCA), what is it and is it important to use as an investor? This method spreads the risk, is this always the case?
DCA has proven itself for long-term investments, and with Bitcoin, its price history confirms that someone who has been practicing DCA for at least 3 years is always a winner.
You’ve been following crypto news for a while and you think you’re ready to invest but you don’t know how to go about it with the amount of money you have at your disposal, so here are some things that might help you.
DCA or Dollar Cost Average what exactly is it?
You have a certain amount of money to invest, so you have two choices. You can either invest it all at once, or you can invest in small amounts over time, which is the DCA method.
Dollar cost averaging (DCA) is the idea of investing a large amount of money over an extended period of time. DCA will effectively average the price of what you buy over a longer period of time. Hence the name average dollar cost of your purchase.
When you want to invest, you are always afraid that the price will fall just after you buy. In fact, it is quite possible, the market can quickly lose a few percent in one day.
When volatility is high, as it frequently is these days, the price can drop several percent quickly and this creates a sense of frustration and if it continues to drop, sometimes it turns into a panic, and you sell at the lowest price, in order, you think, to save the money you have left.
Investing all of a sudden, requires know-how, knowing exactly when to buy and a strong mental attitude.
However, instead of investing it all at once, you can decide to average the dollar cost of your purchase. You cut your investment amount into several parts and choose to invest a portion each month for a year, for example.
That way, if the price drops significantly shortly after your first investment, you will have saved a lot of money since the average price of your investments will be lower than it would have been.
Thus, the main benefit of the DCA is to protect you from a decline shortly after your investment.
This method may seem reassuring, especially when investing in cryptocurrencies, but is it really in all cases or on the contrary, should it be used only in certain specific cases, so in no case all the time? This is what we will see below.
DCA, the truth about this method:
As always, the investor needs certainty, it reassures him, so you will find many people who will swear by the DCA method, let them speak, but know this, and then make your own opinion.
With the DCA method, you have eliminated a significant risk, if the market goes down quickly and for a long time and you are buying. In this case, yes, the method is good.
On the other hand, if you are buying and the market only goes up over the medium term, you have in fact exchanged one risk for another, because almost all your purchases will have been made at a much higher price than the first.
We must not forget that the market is intended to be bullish. If you are buying after a sharp price correction, it may be wise to invest a larger amount of money up front than when the price is at its highest and you are buying in the hope that the price will continue to rise.
You have to know where the price is, its cycle, the probabilities, in short, you have to know how to nuance. The DCA method is not the solution to use in all situations.
In summary, you should know that when you use the DCA method, you are betting against the market. However, there is a higher probability that the market will go up than down. Therefore, by using dollar cost averaging, you increase your risk.
DCA will only protect you from the risk of the stock falling during the DCA period. There is nothing to prevent the market from plunging the day after your DCA investment ends. It is therefore a short-term protection.
DCA is a short-term strategy! If you want to invest for the long term, it is not a good strategy. Most of the time, it will not work.