“Buy low, sell high” – the key to successful investing is never simple. Or is it? Today we’ll examine a core investing strategy counters our desire to time the market and potentially loose big.
What is DCA?
Dollar Cost Average (DCA) investing is a strategy where a set amount of money is invested at regular intervals – ie every month, quarter, week, etc. DCA is useful for more volatile investments like crypto currency and stocks because it smooths out your average buy in price over time. Many investors may practice DCA without realizing it, especially if they contribute to a retirement plan like a 401(K) where deductions from paychecks are made monthly to invest into the market.
Passive investors love DCA because it reduces timing risk, which is the likelihood you’ll buy at a high price right before the market falls. Instead of investing a large sum of money at once, DCA allows you to invest smaller portions at different times, lowering the risk of any single large market move by spreading investments out over time.
Historical DCA returns from investing in Bitcoin
Using data directly from Binance, the largest crypto currency exchange, we can see exactly what happens when DCA investing $100/month into bitcoin over a four year period. At the end of this period, you would have invested $5,000, but netted over $22,000 simply by buying small increments at a time! This is a 551% return on investment!
DCA strategies are most effective when investments are consistently made over a long period of time. Setting the time to manually trade can be challenging, so use automation tools to make things easier for yourself. A platform like Satoshi’s Index allows you to not only invest in Bitcoin, but other popular cryptocurrencies.
- Passive investors believe it is better to spend “time in the market” vs trying to “time the market.”
- Dollar Cost Averaging (DCA) is a popular strategy used by passive investors to lower risk by investing relatively small amounts of money at regular intervals
- DCA is generally used for more volatile investments such as cryptocurrency and stocks
- DCA is a good way to spread out risk since putting a lump sum of money into the market all at once may expose you to buying at a peak, which can be tough if prices fall.