What is the averaging of the dollar value?
The main feature of the strategy of averaging the dollar value is in concluding transactions for equal sums of money through the same time intervals. This approach allows you to get a smoothed average purchase price, reducing the risks of volatility for the cost of entering.
DCA needs to develop a plan of transactions that includes operations schedule. They must be done with regular constancy, for example, once a week or twice a month.
As an example, take a deposit with a volume of $ 6000 and a horizon of investment in five years long. One of the options for using DCA is to buy an asset once a month for $ 100 over the next five years.
Is averaging for sale?
DCA is also actively used when selling an asset. As in the case of invested funds, you can get rid of the asset equal shares with certain criteria: price level, date and the like. This can reduce the risk of untimely exit from the asset and protect it from lost profit.
When is the best to use averaging?
The DCA method allows you to level the risks of volatility for entering the price and reduce the financial burden to fulfill the long -term investment plan.
DCA is suitable for buying an asset in the bear market. Instead of predicting the “bottom”, the investor makes transactions in accordance with the predictable plan, reducing his average entry point due to the constant reduction in the price of the asset.
Availability suggests that the investor in advance determined for himself the long -term potential of the growth of the asset in which he is going to invest. This strategy cannot protect from the fall in prices.
What are the advantages of this method?
Using averaging the average cost, investors get several important advantages:
- Lack of emotional solutions. A clear plan of action suggests that all attention is paid to the purchase or sale of an asset in certain periods, which avoids the risks of making counterproductive emotional decisions.
- Time saving. The entrance point to the market (or exit from it) is determined regardless of specific conditions. This frees the time that could be spent on analytics and constant monitoring of the market situation.
- Low costs. Not all investors can or want to invest a significant amount at once. DCA allows you to create a comfortable plan for any financial capabilities.
- Falling price is a positive factor. Reducing the value of the asset during the investment period means improving the average input price, which increases the estimated profit with future growth.
What are the disadvantages of averaging?
The main and integral part of DCA is an increase in the price of an asset in the selected period of time. The method will not bring any benefit if the coin continues to fall in price. For this reason, it is worthwhile to carefully choose a tool for investment or trade.
In the DCA stock market is more suitable for investing in index funds of type S&P 500 and Down Jones, not individual papers. Although, on the Internet you can find a lot of averaging calculators, including for shares.
Who uses the averaging for cryptocurrencies?
DCA is often resorted to acquire large volumes of crypto assets in a short time. The most famous people using cryptocurrency are attributed to the founder of Twitter Jack Dorsie. In 2019, he said that he would invest in bitcoin no more and not less than $ 10,000 every week.
In 2018, the general director of the popular BRD Crypto Cryptocide Adam Tradman, the general director of BRD, announced the use of DCA. His approach meant buying BTC every few days. According to Tradman, DCA helps to avoid psychological stress when buying an asset for a large amount.
According to analysts, the DCA method is most likely adhered to Microstrategy, which made several large purchases of bitcoin in 2020 and 2021. When reporting about the next acquisition, the CEO of the company Michael Saylor calls the average purchase price.