A Beginner's Guide to Auto-Invest

Dollar-Cost Averaging (DCA), Explained

Dollar-Cost Averaging (DCA) is an investment strategy that can help you reduce the effects of the volatility experienced when purchasing digital assets. Instead of buying crypto all in one go, you spread your purchases over regular intervals. This will average the price you pay and reduce the chance of entering the market at a relatively worse entry point. It's particularly useful for purchasing assets like crypto that often experience volatility.

Imagine you want to buy $1,000 of bitcoin (BTC). The price is currently $20,000 per BTC, and you make a single purchase of 0.05 BTC for $1,000. However, next week the price is down to $18,000 per BTC, meaning you timed your entry incorrectly within this two-week period.

In such a scenario, DCA might have been a better choice. The table below demonstrates the benefits of a basic DCA strategy for two $500 purchases over these two weeks. With DCA, you would have ended up with a lower average price and more BTC than with a one-off, mistimed investment. There is, of course, also the chance you time the market well and invest when the price is lower in week two. However, the risk still remains, and you cannot guarantee this situation. Refer to the table below for both a well-timed and poorly timed scenario. 

Scenario 1: BTC price goes down

Let’s look at the opposite situation where the price rises. Again, imagine you have $1,000, and you want to invest in BTC. The price is currently $18,000 per BTC, but you think in a few weeks, the price will decrease. You decide to wait until then. 

Two weeks later, the price actually goes up to $20,000, so you end up purchasing 0.05 BTC for $1,000. If you decided instead to DCA across the two weeks, you’d experience a lower average price than the one-off payment and also purchase more BTC.

Scenario 2: BTC price goes up

As you can see, using DCA smooths out price fluctuations when entering the market. While there is a chance that with one purchase, you could enter at a reasonable price, there is no guarantee that the single moment you choose to invest will be optimal. Using DCA simply reduces the risk of entering at a relatively poor price point by letting you purchase the asset at an average price over an extended period of time. Keep in mind, however, that DCA doesn't guarantee a successful investment.

You can learn more about DCA in the following guide: Dollar-Cost Averaging (DCA) Explained | Binance Academy