What is DCA?
DCA (Dollar-Cost Averaging) is a price averaging strategy in which investors break down their invested capital into different periods and time cycles instead of investing it all in one go. In the highly volatile cryptocurrency market, DCA helps reduce the impact and price risk on the portfolio, shortening the break-even period.
DCA strategy implementation process
- Selecting potential coins is based on the assessment of factors: large capitalization, strong team, determining the development path in the short and long term.
- Choose the right price average form
- Allocate funds and investment cycles, dividing accounts into certain ratios depending on financial capabilities and risk appetite.
DCA price averaging formula
- The number of new tokens/coins purchased is less than the number of tokens/coins purchased
Weak price average = (Old purchase price x number of old tokens/coins purchased + new purchase price x number of new tokens/coins purchased) : total number of tokens/coins purchased Example: 8/30/2022: buy 1000 USDT for $2. 8/31/2022: buy another 500 USDT for $1.5. In particular, the total amount of USDT purchased is 1500. Average purchase price = (1000 x 2 + 500 x 1.5) : 1500 = $1.83.
- The number of tokens/coins purchased new is equal to the number of tokens/coins purchased
Average balance price = (Old purchase price + new purchase price) : 2 Example: 8/30/2022: buy 1000 USDT for $2. 8/31/2022: buy another 1000 USDT for $1.5. In particular, the total amount of USDT purchased is 1500. Average purchase price = (2 + 1.5) : 2 = $1.75.
- More new tokens/coins than old tokens/coins
Strong purchase price average = (Old purchase price x number of old tokens/coins purchased + new purchase price x number of tokens/new purchases) : total actual number of tokens/coins of times Example: 8/30/2022: buy 1000 USDT for $1. 8/31/2022: buy another 3000 USDT for $1.5. In particular, the total amount of USDT purchased is 1500. Average purchase price = (1000 x 1 + 3000 x 1.5) : (1000 + 3000) = $1,375.
Pros and cons of the DCA strategy
- Reduce price risk in the face of market fluctuations, increase the liquidity of assets.
- Balance the portfolio and help the asset have long-term potential.
- Help investors build a disciplined investment strategy, avoid emotional investment decisions.
- The more transaction costs, the greater the number of transactions, the higher the cost.
- The target return is only average, which is not the optimal option for short-term investors.
- Time-consuming because investors have to trade many times.
Notes when using the DCA strategy
- DCA should not be applied when trading Margin, Futures. The higher the leverage ratio, the greater the risk ratio, the investor may face the risk of account fire.
- Illiquid altcoins or altcoin/BTC pairs should not be chosen. DCA should only apply to top reputable coins with solid and really promising foundations such as BTC, BNB, ETH,…
- DCA is only effective for holders with long-term investment goals, which is not suitable for traders in seeking profits based on the rise/fall of the coin price.
- Investors need to develop an effective capital management plan, avoid being psychologically affected by market fluctuations.
DCA is a simple tool that helps investors accumulate potential assets in the long term. Holders need to assess the potential of the coin and consider the investment prospects to develop an effective capital allocation plan.