What Is Dollar-Cost Averaging? Definition, Benefits, & Examples

Investing can feel overwhelming, especially with the constant ups and downs in prices. If you’ve been searching for a reliable way to build your portfolio without the stress of market timing, you might want to learn more about what dollar-cost averaging is. 

In this guide, we’ll walk you through a detailed example of how this strategy works, including clear calculations and a step-by-step DCA table.

What is dollar-cost averaging?

Dollar-cost averaging or DCA is an investment strategy to buy assets regularly with a fixed dollar amount. It means putting a fixed amount of money into an investment on a regular schedule. It doesn’t matter if the price of the cryptocurrency is going up or down. You just stick to the plan and keep investing the same amount each time.

For example, if you want to invest $1,200, you can invest $100 each month for a year. This method helps reduce the risk of investing a large amount at a peak price. This can reduce the risk of losing a lot if the market suddenly drops. DCA is good for people who want to invest steadily without worrying too much about timing.

Now, for a better understanding, look at this current MicroStrategy Bitcoin investment graph, they are continuously buying BTC at different prices to average out the actual price. Their average buying price is $61,694, while the current BTC price is $97,619. Hence, they achieve a 58.44% profit over time with DCA.

How does dollar-cost averaging work?

Dollar-cost averaging works by setting up a routine where you invest a fixed dollar into cryptocurrency at regular intervals, regardless of the market’s ups and downs. 

Let’s say you decide to invest $50 every week into Bitcoin. If Bitcoin’s share price is high one week, you’ll get fewer shares or coins for your $50. Conversely, if the price drops, you’ll buy more coins with the same amount. Over time, this averages out the cost of your investment. 

The beauty of DCA is that it removes the need to predict market highs and lows. Instead, you consistently buy, which can smooth out the volatility and potentially lead to better long-term gains. It’s a disciplined approach that can help manage risk in an unpredictable market like crypto.

Benefits of dollar-cost averaging

• Less Risk: Dollar-cost averaging (DCA) spreads out your investment, so you’re not putting all your money in at once. If the crypto market declines, you won’t lose everything at once because you’ve only got part of your investment in at any given time.
• Lower Average Cost: With DCA, you end up buying more when prices are low and less when they’re high. This means, over time, you buy at a lower average price.
• No Need to Predict the Market: Guessing when to buy crypto can be tough. DCA takes that stress away because you just keep investing the same amount regularly, no matter what the market’s doing.
• Encourages Regular Saving: DCA gets you into the habit of investing regularly. It helps build discipline, which is great when dealing with something as unpredictable as crypto.
• Keeps Emotions at Bay: The crypto market can make you feel all sorts of emotions. DCA helps because you’re not making decisions based on how you feel about price changes; you stick to your plan.
• Good for Small Investors: If you don’t have a lot of money to invest all at once, DCA lets you start with whatever you can afford each time. It makes investing in crypto accessible to more people.

Drawbacks of dollar-cost averaging

• Might Miss Out on Gains: If you start DCA right before a big market surge, you’ll wish you’d put all your money in at once. You end up buying at higher prices later, missing potential profits.
• Transaction Fees: Every time you buy crypto, there’s usually a fee. If you’re doing DCA with small amounts, these fees can add up, eating into what you make.
• Not Great in a Bull Market: If you’re using DCA while the market’s just going up, you’re buying at higher and higher prices. You might end up with fewer coins than if you’d invested all at once at the start.
• Slow Growth: DCA can feel like you’re not getting rich quick. It’s all about steady growth, which isn’t for everyone who wants fast returns.
• Can Be Tough Emotionally: When prices fall, it’s hard to keep investing. DCA requires patience and discipline to keep going, even when you see your investment value drop.

Example of dollar-cost averaging

Let’s take the example of John, who wants to invest in Bitcoin but is worried about its volatile price. Instead of investing a large amount at once, he decides to use dollar-cost averaging (DCA). John plans to invest $100 every month for a year (12 months). He follows a disciplined approach and invests on the 1st of each month, regardless of the Bitcoin price.

Below is the detailed breakdown of John’s investment over 12 months:

To find the average cost per Bitcoin for John, we use the total amount invested and the total BTC bought:

Total BTC Bought: John purchased 0.025993 BTC in 12 months

Total Investment: $1,200 over 12 months

Average Cost Per BTC: 

Average Cost = Total Investment / Total BTC Bought = 1,200 / 0.025993 ≈ 46,157 USD per BTC

Comparing DCA with Lump-Sum Investment:

If John had invested all $1,200 at once when Bitcoin was at $50,000 in Month 1:

He would have received: 1,200 / 50,000 = 0.024 BTC

Through DCA, however, John ended up with 0.025993 BTC by buying Bitcoin at various price points. This means he got slightly more Bitcoin for the same amount of money by averaging out his purchases, especially because he invested during periods when Bitcoin prices were lower (e.g., $30,000).

This example shows how DCA helps investors avoid the pressure of market timing and reduce risks from price volatility. By consistently investing, John ended up with a larger Bitcoin portfolio and a lower average cost compared to a lump-sum investment.

How can you set up dollar-cost averaging for your crypto investments?

Setting up dollar-cost averaging (DCA) for crypto investments is straightforward and can be done with the following steps:

1. Choose Your Cryptocurrency Exchange or Broker: Select a platform where you can buy cryptocurrency. Make sure it supports the crypto you want to invest in and offers features for automated trading bots or recurring purchases. We recommend Binance because it has an “Auto-invest feature”.
2. Open and Fund an Account: If you haven’t already, sign up for an account and complete any necessary identity verification. Once verified, deposit funds into your account. This can be done via bank transfer, debit/credit card, or other payment methods.
3. Determine Your Investment Amount and Frequency: Decide how much you want to invest per period (e.g., $100 per month) and how often (weekly, monthly).
4. Set Up Recurring Buys: Most exchanges now offer an option for setting up recurring or automatic purchases. Look for terms like “Recurring Buy”, “DCA”, or “Automated Investment”. Enter the amount you want to invest, select the cryptocurrency, and choose the frequency (like every week or month). Some platforms allow you to choose the day of the week or month for the investment to occur.
5. Monitor Your Investments: Even though DCA is about automation, you’ll need to check in to see how your investments are doing. You might need to adjust your investment amount if your financial situation changes or if you want to react to market trends, although DCA is meant to minimize this need.

Conclusion

In wrapping up, dollar cost averaging? It’s an investing strategy in which you invest a fixed amount into cryptocurrency at regular intervals, regardless of price changes.  This approach can help smooth out the ups and downs of the market, potentially leading to a lower average cost for your investments over time. 

It’s especially useful for those who want to invest without the pressure of timing the market perfectly. Whether you’re just starting or looking to manage risk better, DCA could be a smart way to grow your crypto portfolio.

FAQs

Is dollar-cost averaging a good strategy?

Yes, dollar-cost averaging can be a great strategy if you want to invest in cryptocurrencies without worrying about when to buy. By putting in the same amount regularly, you end up buying more when prices are down and less when they’re up, which could mean you pay less on average. 

This approach is especially handy in the wild swings of the crypto market, helping you avoid the risk of putting all your money in at the wrong time. However, if the market only goes up, you might miss out on bigger gains by not investing everything at once.

What is the best strategy for dollar-cost averaging?

The best way to do dollar-cost averaging is to decide on a regular investment plan that fits your budget, maybe weekly or monthly. Pick an exchange that lets you set up automatic buys if you can, or just remember to do it yourself. 

It’s important that you only invest money you can afford to lose and stick to your plan no matter how the market moves. Also, watch out for fees because they can eat into your investment, especially if you’re buying small amounts often. The trick with DCA is to keep going steadily and patiently.

How do I calculate dollar-cost averaging?

To figure out your dollar-cost averaging, first add up all the money you’ve put in over time. Then, count up all the cryptocurrency units you’ve bought. Divide the total money by the total units to find your average cost per unit. 

For instance, if you’ve spent $600 over six months and got 0.015 BTC, your average cost per BTC would be $600 divided by 0.015, which is $40,000. 

Doing this calculation shows you how much you’re really paying for each piece of cryptocurrency over time, which can be quite enlightening when you see your numbers.

Is it better to DCA or lump-sum?

If the market’s going up, putting all your money in at once could give you better returns because you buy at a lower price right away. But if the market’s all over the place or you’re not sure when to invest, DCA can be safer since you spread out your risk. 

It’s also good if you don’t have a big chunk of money to invest all at once. You might find that lump-sum investing can be stressful, but DCA can make the process smoother and less nerve-wracking. 

In the end, DCA might be the way to go if you’re worried about timing, while lump-sum could be better in a consistently rising market.