Active trading can be time-consuming, stressful, and still yield poor results. However, there are other options out there. Like many investors, you might be looking for an investment strategy that is less demanding and time-consuming.
But what if you want to invest in the markets but don’t know how to start? More specifically, what would be the optimal way to build a longer-term position?
In this article, we’ll discuss an investing strategy known as Dollar Cost Averaging (DCA), which provides an easy way to mitigate some of the risks of entering a position.
What is Dollar-Cost Averaging
Dollar-cost averaging is an investment strategy that aims to reduce the impact of volatility on the purchase of assets. It involves buying equal fiat amounts of the asset at regular intervals.
Let’s look at an example of dollar-cost averaging:
On the first of January, Frank and Emeka decide they wish to invest in Bitcoin. However, they have different profiles and distinct investment strategies. On the one hand, Frank wishes to purchase $500 of BTC each week until he accumulates one entire bitcoin.
Frank managed to accumulate one BTC for a total price of $9500 over time, by investing $500 each week regardless of the price volatility. Emeka, on the other hand, decided to purchase one whole Bitcoin at once.
Emeka acquired one BTC on the 1st of January, with a total investment cost of $13,400.
Such an example illustrates how the DCA strategy may be useful. In this case, Emeka has paid significantly more than Bob, by purchasing one BTC all at once, and he didn’t have any other opportunity to buy lower because he decided to enter the market in a single move.