Dollar-cost averaging (DCA) is an incredible investment strategy where an investor divides the total money he/she wants to invest across different purchases of an asset in order to reduce volatility and its impact on his overall purchase. His purchases happen regardless of his asset’s price at regular intervals. So this strategy of investment removes a lot of detailed work to time the market so that he can make purchases at the best possible prices. Dollar-cost averaging is also called a constant dollar plan.
Dollar-Cost Averaging: An Effective to Counteract Short-term Volatility
A good example of dollar-cost averaging is its use in USA’s 401(k) plans, where regular purchases are made irrespective of the price of the given equity within an account.
In a 401(k) plan, an employee can opt for predetermined money of their salary that they want to invest in the index or mutual funds. When an employee gets his/her pay, the money he/she has chosen to contribute to the 401(k) is in turn invested in their investment options.
Dollar-cost averaging is also used outside of 401(k) plans, like an index or mutual fund accounts. Also, several dividend reinvestment plans let investors to dollar-cost average by contributing regularly.
Dollar-cost averaging in different investments
Say an investor decides to buy $1000 worth of, say ABC corp. at the same time, every month for the next four months. Here, let’s also assume the stock first reduces in value but rallies very well.
Using the dollar-cost averaging strategy the investor would have bought 271.22 shares for a total of $4000. His average price per share for this period of time would have been just $14.69 (as calculated: $4000 / 272.22 = $14.69). With the stock price ending at $18 of this period, the investor’s total worth would be $4900 (calculated as 272.22 shares * $18 = $4900). As a result, the investor would show a profit of $900 on his overall position in spite of the fact that the stock reduced in value over a period of four months (dropping to $18 from $20).
But if the investor had opted to invest $4000 in shares in ABC Corp. all at once at the start of this period, then he would have bought 200 shares at a price of $20 per share. With the stock ending at $18 by the end of four months, the investor than would have shown a net loss of -$400 on the stock.
The above example clearly shows the benefits of dollar-cost averaging, especially during periods of volatile prices of shares.
You can clearly define how often or how regularly you can invest in Bitcoin with the help of dollar-cost averaging, usually by using the same amount of money. For instance, if you have $500 and you want to invest in Bitcoin, you can distribute that as five $100 purchases per week instead of using all $500 in one go, which will leave you overexposed. You can also use dollar-cost averaging to match a percentage of your daily, weekly, or bi-weekly or monthly earnings. For example, you can assign 1% of your salary to monthly purchases as per your dollar-cost averaging strategy.
Let’s take a look at the following example, the difference between buying in a lump sum and using DCA strategy. At the end of six months, the profit made through lump sum buying and DCA buying is very different. The profit made through DCA buying is significant as compared to lump sum buying.
|LumpSum Buying||DCA Buying|
|Date||Price||Satoshi||Amount invested||Satoshi||Price||Amount invested|
|12 Oct 2018||6196||1||6196||0.16666667||6196||1032.666667|
|12 Nov 2018||0||0||0||0.18762112||5504||1032.666667|
|12 Dec 2018||0||0||0||0.32443188||3183||1032.666667|
|12 Jan 2019||0||0||0||0.28526703||3620||1032.666667|
|12 Feb 2019||0||0||0||0.28829332||3582||1032.666667|
|12 Mar 2019||0||0||0||0.25881370||3990||1032.666667|
|Sold on 5th Apr @5049||6196||1||5049||1.51109372||5049||7629.512206|
Say, an investor in the year 2006 invested in gold in the hope that its price would hit high, maybe $700 per ounce. Instead, the price of gold went down drastically and more than doubled in future years. If the investor, a market timer, had waited for the gold to hit $700 per ounce, he would have failed miserably. But if he had chosen dollar-cost averaging and was aware of time in the market, he would have greatly benefited from the rise in the price of gold in that entire time period.
Importance of Dollar-Cost Averaging
Millions of investors across the world use dollar-cost averaging because of the advantages it offers as listed below.
- It is a very attractive choice for investors around the world who want to contribute to their investment strategies regularly
- It gets rid of issues like market timing. As such, investors’ returns will be determined by the overall trend in a given stock instead of their specific entry price. Also, it helps investors a great deal in reducing their cost basis on other securities that usually decline in value over a period of time.
- It also helps you reduce the risks of losing more money. If you are planning to invest any assets that offer to invest in regular intervals for the long term, DCA will always be the best strategy to apply.
Automate the Dollar Cost Averaging in Bitcoin Using Bitdroplet
Bitdroplet lets you create long-term financial goals. Start by investing in cryptocurrencies in small quantities at regular intervals. With the help of bitdroplet, you can invest in digital currencies through SPP (Systematic Purchase Plan), which is quite similar to Mutual Funds’ SIP (Systematic Investment Plan). For now, you can only invest in Bitcoin through bitdroplet, but the list is expected to grow soon.
The principle of Bitdroplet is dollar-cost averaging. Using dollar-cost averaging, you can reduce the average purchase price of the asset as compared to its present market price. Long-term investment in Bitcoin has more benefits as compared to Fixed Deposits, Mutual Funds, Stock Market, Recurring Deposits, etc.
The minimum amount of money you can invest through Bitdroplet is 5 USDT. The amount you invest is channeled through your Bitbns wallet, where the minimum limit of deposit is 15 USDT using P2P USDT Transfer. If you already have USDT in your Bitbns wallet, you can directly invest the USDT that you hold.
What is Dollar-Cost Averaging (DCA)?
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