What is dollar cost averaging (DCA)?
DCA is a technique used by investors (not day traders) where you buy a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price.
Why should you use DCA? You should DCA if:
- you believe that the market you want to invest in will go up in the long-term
- the market is volatile at the moment and it is difficult to decide on a good entry point when to buy in
So in this case, rather than using up all your money in one single purchase, you are spreading the investment over a period of time, which is why it’s called averaging. So rather than buying 10 BTC at $11,000 today, you buy 2 BTC today at $11,000, 2 next week, 2 the week after and so on. Essentially, if you’re investing for long-term, you don’t want to bet all your chips on one market move because no one can time the market. This is very dangerous in finance and it can often lead to great losses. Remember, the first most important thing in trading and investing is not to lose your money. Then you’re thinking about potential gains.
Let’s see 2 examples:
1) INVEST ALL YOUR MONEY IN ONE PURCHASE
You are looking to buy some Bitcoin but you don’t know when is the right time. Then suddenly you notice the market going down 20% and you think that this is a great time to buy the dip. So you buy $10,000 worth of Bitcoin when the market dipped 20%. Now all you can do is sit and watch how the market plays out – maybe in 3 weeks time, the market will have dropped 50% from what it is now, therefore you missed a great opportunity!
2) SPREAD YOUR INVESTMENT OVER SEVERAL WEEKS
You spread your $10,000 investment over the next 20 weeks – so buy $500 worth of Bitcoin every week for the next 20 weeks. It does not matter what the price is – each week the price will be different – it could go up or down, it doesn’t matter, you will still buy it.
At the end of your 20 week journey you have invested your $10,000 and own however much crypto the market allocated. You didn’t make 70% ROI but you also didn’t lose 70%. Because you believe that the market is going up overall (like I said before), you sit back and watch the total value of your portfolio increase over time. You are spreading out your risk over the 20 weeks in which you are investing – you are not taking all the risk in one single purchase!
How do I do DCA?
I will show you how to do DCA on Coinbase. You log in to your Coinbase account, go to Tools and then Recurring transactions. Press on New Recurring Transaction and you should see this:
Go through the security checks and that’s it, you’re now all set for dollar cost averaging!