How does dollar cost averaging work?

HowToToken Team Staff asked 3 years ago
1 Answers
HowToToken Team Staff answered 3 years ago

Here is an explanation from theoneandonlypatriot, a user of Reddit forum.

DCA is a tool that is used to minimize risks of volatility in such risky markets as markets of cryptocurrencies. It says that one should invest the same amount of dollars into coins over timeframes. Why this is beneficial?

Imagine you invest 100$ into a coin at 3.75$. Then the price goes down to 2 dollars and you do nothing. To get positive ROI you need a growth of 87.5% now. That’s a lot and you are likely to spend a lot of time for the price to recover to cover your initial costs.

Imagine, however, that you invest at 2$ 100$ again. Now your average purchasing price is 2.59$. To get positive ROI now you need a growth of 30%. Still pretty much but much less than 87.5%, right?

This is how DCA works. However, it should be also mentioned that practicing DCA during price booms might be harmful for your profits. Nevertheless, this strategy should be considered if you do not want to experience huge drops of your portfolio.

Dollar Cost Averaging & You from CryptoCurrency