Hello! I'd like to seize this moment to offer my insights on the Dollar-Cost Averaging (DCA) strategy, aiming to clarify its concept and its intended purpose for those who may still find it unclear.
DCA involves consistently investing smaller, equal amounts over time, as opposed to making large, irregular crypto purchases. Think of it as making payments for a product in installments, at regular intervals, until the total is paid off. When you regularly invest in your preferred cryptocurrencies, you automatically accumulate more assets over time, regardless of market fluctuations. This can help you grow your holdings and potentially reduce your overall average cost during market dips.
In contrast, a lump sum payment is a one-time investment, the opposite of DCA.
Let's delve into how DCA operates:
Imagine the current price of BTC is $20,000, and you're a high-earning individual looking to invest in this asset. If you make a lump sum investment, you would acquire one BTC at a cost of $20,000.
However, with DCA, you spread that $20,000 across five equal $4,000 purchases, resulting in costs of $20,000/BTC, $15,000/BTC, $5,000/BTC, $5,000/BTC, and $25,000/BTC. This approach yields an average cost basis of $18,000, and you'd have 2.3 Bitcoin. When Bitcoin's price eventually rises, your gains can be amplified because you lowered the average cost of acquiring your holdings. With DCA, you steadily accumulate more Bitcoin, even during market ups and downs.
To illustrate, your first purchase acquires 20% of 1 BTC at $20,000. The second purchase, at $15,000, gets you 26.66% of 1 BTC. Your third and fourth purchases, both at $5,000, result in a total of 80% of 1 BTC with each buy. Your final purchase, at $25,000, represents about 16% of 1 BTC. In total, you've accumulated around 2.3 BTC.
However, it's important to note that DCA may not always work in your favor. In some situations, it could increase your average cost, especially during a bull run. Nevertheless, the purpose of DCA is to spread your investments incrementally, which can be advantageous in the long run. It provides a balanced approach to accumulating assets, ensuring you still acquire your desired cryptocurrency. I hope this explanation sheds light on the essence of DCA.
I am going to quote part of a post here because I think it adds value to the conversation and what you are actually looking for:
People are trying to figure out the best way to invest in cryptocurrency because it can be very unpredictable. If you're an investor looking to reduce your risk, you might consider a strategy called dollar-cost averaging (DCA). However, using this strategy means you're less likely to make really big profits.
No, that strategy doesn't mean you're less likely to make really big profits. Many people say this in hindsight knowing what the price of Bitcoin was over all those early days/years. But check out this example provided by
JayJuanGee:
Frequently I have brought up an example of someone who might have lump sum bought BTC in 2015, and s/he bought 20 BTC for around $6,660 (so the average price per BTC is around $333), as compared with someone who might have ended up buying more regularly and more frequently and spending
$100k in order to buy 100 BTC between 2015 and 2019 with an average cost of $1k per BTCToday. Which one would you rather be? The one who has 20 BTC has much greater profits 3x more profits since his cost are only around $333 per BTC as compared to the one with 100 BTC and a cost that is 3x higher per BTC. Total portfolio value is $520k for the one with 20 BTC and $2.6 million for the one with 100 BTC.
JayJuanGee also provided a
link for a DCA calculator that you can use to play around with. There is no strict rule that says DCAing will get you less compared to investing a lump sum. It's all about timing, and timing is about luck. With a lump sum that luck can be bad, neutral or good and the scale is veeeery large from bad to good when it comes to specific timings.
The answer has been given here that you can twist numbers and amounts and timing and time ranges as much as you want and then get the result you are looking for. If you want to find out that DCA would make you be worse off, just change your timings or a potential initial lump sum and there you go. But when you take a realistic example like the one provided by JayJuanGee, there is no tweaking in the parameters down the road. There is a starting date and an end date and it is impressive how DCAing did in fact outperform a lump sum.
This is because you have those peaks like in 2017 at just under 20k and then it goes down all the way to I think 3.5k and that is when your DCA approach really kicks in. You are buying Bitcoin all the way down in predefined intervals and you benefit from every single bit of the price drop until it reached the bottom. From there every buy you made/make gives you the full benefit of the bull run up to the almost 70k we had. A lump sum is like throwing a dart with a blindfold. It can be amazing, but a lump sump invested after the first bull run up to almost 20k would have probably killed you emotionally unless you really didn't need the money. Going down from 20k to 3.5k is very painful to watch. Doing so while investing with a DCA strategy lets you still sleep very well because you had a plan in place from the very start and lower prices means more Bitcoin. Hence price development does not only have one side of the coin, you always have something positive to look at.
