What is a DCA strategy and why its important?

Constantly monitoring prices and trying to actively trade can be a very stressful and time-consuming activity for many investors, and it is not as easy as it may seem at first glance. Attempts at active trading and market timing often end in losses, and research shows that market timing leads to poorer investment results over the long term.

Fortunately, there are a variety of passive investment strategies that are effective, simpler and less time-consuming. One is the Dollar Cost Averaging (DCA) strategy, one of the most popular passive investment strategies.

What is DCA?

Dollar Cost Averaging (DCA) is an investment strategy that aims to reduce the impact of volatility when purchasing assets. This strategy involves buying an individual asset or portfolio of assets at the same amount of fiat money at regular intervals.

The basic premise of this investment strategy is that the investment is not subject to the volatility to which a single investment is. In fact, buying at regular intervals averages the entry price, and in the long run this strategy reduces the negative impact and risk of poorly timed entry into the market.

Why is it worth investing with the DCA strategy?

• DCA eliminates the need for market timing: DCA allows you to spread your investments over multiple periods and buy entry assets sequentially. This way, there is no need to estimate or analyse the optimal time to enter the market. Market timing is a very challenging activity even for experienced and professional investors.
• DCA does not require a high initial investment: as the DCA strategy is based on small but regular purchases, there is no need to have a large amount of capital available at any one point. This strategy is especially beneficial if you don’t feel comfortable with investing your savings in cryptocurrencies, but instead you set aside a small portion of your paycheck each month and invest that.
• DCA reduces the impact of emotional reactions: investing is often accompanied by emotional reactions such as fear or, conversely, overwhelming greed. DCA helps eliminate these reactions by breaking investments into smaller chunks over time and avoiding huge purchases at one time. This allows the investor to be more disciplined and rational.

• DCA reduces risk in investing: investing with DCA spreads the risk of entering the market. Instead of putting a large amount into the market at once and risking entry at times of high prices, DCA invests smaller portions on a regular basis. This reduces the impact of price fluctuations and potential market entry right at the peak of the market cycle.
• DCA avoids prediction and speculation: investing with DCA is based on the regular and systematic purchase of assets without the need to predict future market movements. This avoids speculation and seeks to achieve more stable results over the long term.
• DCA takes advantage of low prices: DCA ensures regular investing, which means that it buys more cryptocurrencies at a lower price during market downturns. This strategy takes advantage of the opportunities the market offers and allows the investor to buy even during low prices and price drops, increasing the potential for returns over the long term.

However, it is important to note that the DCA strategy does not guarantee a profit or complete elimination of risk. However, it may be an appropriate strategy for those who want to invest for the long term and seek to avoid emotional investment decisions.

A practical example of DCA

Suppose we have €5,000 available and decide to invest in Bitcoin using the DCA strategy in January for the next 5 months. The price of Bitcoin at the beginning of January is €20,000.

• At the beginning of January, we buy Bitcoin for €1,000, we receive 0.05 BTC at the exchange rate of 1 BTC = €20,000.

• In February, the price of Bitcoin is €18,000. At the beginning of February, we buy Bitcoin for 1,000 €, we receive 0.0555 BTC at the exchange rate of 1 BTC = 18,000 €.
  
• In March, the price of Bitcoin is €22,000. At the beginning of March, we buy Bitcoin for €1,000, we receive 0.0454 BTC at the exchange rate of 1 BTC = €22,000.
  
• In April, the price of Bitcoin is €17,000. At the beginning of April, we buy Bitcoin for 1,000 €, we receive 0.0588 BTC at the exchange rate of 1 BTC = 17,000 €.
  
• In May, the price of Bitcoin is €19,000. At the beginning of May, we buy Bitcoin for 1,000 €, we receive 0.0526 BTC at the exchange rate of 1 BTC = 19,000 €.
  

The model situation shows us the following:

• If we bought Bitcoin in one lump sum for €5,000 at an exchange rate of €20,000 per BTC, we would collect a total of 0.25 BTC. 
  
• With the DCA strategy, we made 5 purchases of €1,000 over 5 months. In total, we managed to accumulate 0.2623 BTC.

One-time purchase strategy: If we decided to sell Bitcoin when the price rises in the future, it would look like this:

The DCA strategy: if we decided to sell Bitcoin when prices rise in the future, it would look like this:

Investing using the DCA strategy in the model situation managed to accumulate 0.0123 BTC more than a one-time investment at a price of €20,000. Selling the accumulated BTC at a price of €60,000 per BTC, the DCA strategy was able to earn us 7.38% more net profit (€738) than a single purchase in the model situation.

Limitations

Although the DCA strategy can be a very useful tool, it also has its limitations. The biggest one is that when the market is in a bull market (asset prices are rising), the DCA strategy can give investors lower returns than a one-time high investment. 

However, most ordinary investors often do not have a large amount of capital available for one-off investments, but may be able to invest smaller amounts over the long term, such as from each paycheck. In this case, DCA proves to be a suitable strategy for averaging entry prices.

DCA Calculator

A dollar cost averaging calculator for the Bitcoin cryptocurrency can be found at www.dcabot.com. There you can set the amount, time horizon or intervals of purchases and create your own simulations to show how different DCA strategies would evolve over time.

You can also use DCA in Fumbi

Investing in cryptocurrencies using a DCA strategy through Fumbi is very easy. With the Auto Deposit feature, you can invest regularly in any of our products very easily and safely.

If you are interested in trying out regular cryptocurrency investing via Auto Deposit, you can set it up in Fumbi Credits. With Automatic Deposit via Fumbi Credits, you can automatically invest a fixed amount of money in your desired Fumbi product at regular intervals.