Dollar cost averaging (DCA) is a long-term and low-risk investment strategy designed to help reduce the effects of volatility. It's popular amongst investors who want to benefit from a better interest rate than a standard savings account but don't have extensive financial knowledge. The stock market is tricky and difficult to read, so it's risky to invest lump sums into one asset.
By dollar cost averaging into an asset class with a long history of appreciating prices, you can be relatively confident you'll make a profit. To further reduce risk, many people DCA into an index fund - a varied basket of stocks that typically perform well. This is a passive way of investing that frees up your time to concentrate on work or family. Most DCA investors use a 'set-and-forget' method: they set automated monthly purchases and don't even think about it again.
How does dollar cost averaging work?
With dollar cost averaging, a person typically makes small incremental investments in a scheduled manner, for example, one investment of $50 per month. Some purchases may buy stock at a high price while others at a low price, resulting in an average price over time. This makes the strategy attractive for amateur investors who don't have the time or skills to study markets and predict prices.
- On 1 January, the ABC price is $10 per stock and you invest $50. You now have 5 ABC stocks worth $50.
- On 1 February, the ABC price is $12.50 per stock and you invest $50 (4 stocks). You now have 9 ABC stocks worth $112.50.
- On 1 March, the ABC price has dropped to $5 per stock. Your $50 investment buys you 10 more stocks, but your 19 stocks are only worth $95.
- On 1 April, ABC has gone back up to $10 per stock. You buy another $50 worth and now have 24 stocks worth $240.
- On 1 May, ABC has gone up to $16 per stock. Your $50 investment gets you an extra 3 stocks, making a total of 27 stocks worth $432.
Overall, the average price that you paid per stock is $10.70.
Total spend: $250
Total profit: $182
If you had invested a lump sum of $250 on 1 January, your 25 stocks would be worth only $400.
DCA also avoids the possibility of timing the market badly and making a loss with a single large purchase. If you have $5,000 in savings and decide to put it all into one stock which crashes the following month, you've lost everything. If you had decided to DCA just $50 into that stock each month, you'd only have lost $50.
Naturally, reducing the risk of loss also reduces the possibility of profit. If the stock doubles the next month, then you've only doubled $50 rather than $5,000. The potential for big gains can make investors greedy, but make one mistake and you could suffer big losses. Even the smartest traders can't predict the market perfectly, so it's best to take the safe route. If you DCA into an asset that has been consistently going up over the past 10 years, you'll enjoy decent gains with minimal risk.
Why do investors choose dollar-cost averaging?
Stock markets are very confusing for those who haven't studied or worked in economics or finance. To many people, a financial chart looks like the scientific plans for landing a rocket ship on Mars. You might understand that Google and Amazon are good companies to invest in, but when is the best time? What if you make a mistake and lose a lot of money?
Dollar-cost averaging removes the stress and uncertainty from investing and helps to avoid making bad decisions based on fake news or heightened emotions. When money is involved, emotions always come into play, and many investors get scared and panic sell at the wrong time. DCA ensures you don't get caught up in this irrational greed or fear, and just let your money do its thing.
What is dollar cost averaging in crypto?
DCA in crypto works in a similar way to traditional markets, although the infrastructure is new and there are fewer on-ramps available to help non-technical users. If you don't know the ins-and-outs of crypto very well, managing your own crypto DCA system could be difficult. Fortunately, companies like Bamboo offer an easy way to ‘set and forget’ your crypto DCA purchases.
You can set up a monthly direct debit that automatically invests a set amount of capital into a basket of the most popular and trustworthy cryptocurrencies. These are not the speculative 'hype' coins that you hear Elon Musk promoting in the news - they're well-established, high-value projects with a long history of growth and profit.
Many crypto DCA investors choose to only invest in Bitcoin, while others spread their investments out within a portfolio of popular altcoins like Ethereum and Litecoin. This method of diversification reduces the risk of you losing all your money if one project fails. You can decide what percentage of your investment goes to each coin, or allow an experienced account manager to choose the best percentage each month based on market conditions.
HODL vs DCA in Crypto
Crypto enthusiasts love to use the term HODL, which originates from a misspelling of HOLD in a forum post from 2013. It has since been popularized to be shorthand for "Hold On for Dear Life", and is used to define one's commitment to never selling their crypto. As such, many enthusiasts will tell you to simply buy a stash of crypto and just hold on and never sell it.
However, what many of them don't know is that you could make even more profit in crypto using the DCA method. Researchers from altcointrading.net compared the profits of varying amounts of Bitcoin and found that in almost every scenario, investors profit more from a monthly DCA model. This is because in certain months prices could be lower than when you started, so these investments result in even more profit.
Using DCA in crypto, you get to both HODL and benefit from catching these low prices - with no need for a big lump sum at the start.
How can I start dollar cost averaging crypto?
Anybody can start a DCA crypto plan with as little as $10 a month. This gives you a low-risk opportunity to test the system and if you like it, you can increase this amount at any time. Even if you know nothing about cryptocurrencies, Bamboo takes the confusion and effort out of setting up a crypto DCA plan.
Simply sign up, connect with your bank, and set your monthly DCA amount. Bamboo handles all the rest!
Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific cryptocurrency will be profitable or equal to corresponding past performance levels. Each investing decision you make should be determined with reference to the specific information available and not based on past performance.The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.