The Dollar Cost Average or Dollar Average Cost (DCA, for its acronym in English) is a well-known investment strategy used in the crypto world or traditional currency trading.
El The main objective of this strategy is to allow the investor to obtain a significant profit on his total investment in the long term.
This is possible because the DCA helps reduce the impact of price volatility when buying crypto or currency.
How is this possible? This is because making regular purchases of cryptocurrencies or currencies reduces the average price of the purchases made, thereby lowering global volatility and increasing the chances of obtaining better returns in the long term.
Dollar Cost Average: its main advantages and disadvantages
As we discussed, the Dollar Cost Average (DCA) can be a useful tool to reduce investment risk. However, investors using this investment strategy may forgo potentially higher returns achievable by other strategies. This is perhaps its biggest disadvantage, since DCA not only averages the cost of your purchases and investment, but also your earnings.
Another point of the DCA is that it is a long-term strategy, more similar to HODL or conventional savings. This means you hold your cash for longer, which has lower risk but often yields lower returns than investing a lump sum, especially over longer periods of time.
So, for example, if the market rises during a period when you are dollar cost averaging, you may lose potential profits that you could have made if you had invested immediately and all at once.
In addition, we must bear in mind that if we perform a cost average in dollars, it is possible that we apply additional commissions by the platforms where we carry out these operations and that these commissions could reduce the profitability of our investments. Finally, one of its biggest disadvantages is the need for great financial discipline. Managing DCA requires focus on strategy, in its good follow-up and in its execution in an exemplary manner.
Having said all this, we can highlight the following advantages:
- As a first advantage we find that reduce the cost of purchasing your assets.
- As a second advantage, it is important to note that it helps to reduce the risk of your investments.
- Also, it is a good way to save or HODL.
As disadvantages we find:
- Higher costs in terms of transactions, since you must buy regularly, with costs that can vary over time.
- It is a strategy that has a lower return.
- This strategy requires strong financial discipline and constant monitoring of the markets if we want to be successful with it.
Why use the Dollar Cost Average (DCA) strategy?
The objective of the Dollar Cost Average (DCA), is to divide your total investment into smaller portions divided into periods of time, where the purchase of cryptocurrencies or currencies can offer you better results than if you invested all that in a single purchase. The idea is based on an element that we see in the markets all the time: volatility in prices.
For example, take a look at the following image and the price changes between USD/EUR:
In a market as controlled and "stable" as the USD/EUR currency market is, you can see times where buying USD (or EUR, depending on your strategy) may work out better with a long-term savings perspective. Of course, this does not prevent your money in those currencies from being diluted by inflation and the centralized reality of those currencies.
But. Does the same thing happen in the crypto market? The short answer is: Yes, and we can use it for our DCA strategy.
Observe the following image:
As you can see, there is clearly an average price in this 30-day price history, with daily ups and downs, so it can be more or less positive to buy BTC at a certain time in order to make your money end. obtaining positive returns following a DCA strategy.
In any case, the idea and objective of applying DCA is to smooth the entry into the market so that the risk of bad timing is minimized. In this way, the potential losses that you may have due to a bad decision at a given moment can be fully or partially recovered during future purchases, maintaining a positive return over time.
Now, you must understand that the DCA does not guarantee a successful investment, but it does offer a much more reliable and easy-to-apply tool, especially for those who do not want to participate in much more complex trading strategies, such as quantitative trading or technical analysis. /fundamental.
Example of a DCA strategy
Now let's look at an example of a DCA strategy where we perform a monthly DCA on the BTC/USD pair. The strategy is simple, on the 25th of each month we make a purchase of $500 in BTC, and with this we bet on a sustained positive DCA strategy for us. Thus, we have that every 25, we go and see the price of BTC and buy at the moment in which we best observe the price, which gives us the following table (of the first 6 months of the year 2022).
In this graph we can see how the purchase is made according to the commented strategy and we can clearly see the returns. In the first month we have no performance, what we buy is what we have. In the second month we already began to obtain a positive investment, having a timid gain of 2,55%. For the third month we have a positive return of 12,97% (1500 euros of investment are worth a total of 1674 euros by then).
However, DCA does not prevent all risks, and in this case we can see that very clearly as well. The arrival of the bear market affects any investor and in this example we can see how the gains we have had are simply eliminated by the drop in the price of BTC, falling to negative numbers (-17% for May and -71% for June) .
If you are interested in learning how to perform these calculations, you can download the ODS document DCA-Bit2Me (Libreoffice Calc) so you can try and make your own DCA investment sheet. Besides, you can also use a web like DCABTC to perform this type of operation.
Of course, your purchase in BTC remains the same, but its value has fallen, making it clear that you must understand the type of asset you invest in, the risks associated with it, and have a good crypto-financial education to adjust the investment strategy and know how. act on these events.
In any case, as you can see, the Dollar Cost Average (DCA) can be an excellent financial investment tool in the crypto world, one that can give you very good returns and opens the door to savings for your future.
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