Hey there 👋,
Great that you found this page, and welcome to the Donut University!
This space is entirely for you to learn a little more about cryptocurrencies and decentralized finance (DeFi). Below, we discuss a widely used investment strategy known as: Dollar Cost Averaging.
WTF is Dollar Cost Averaging?
We got you, don’t worry. 😅
Dollar Cost Averaging is a strategy in which an investor buys the same dollar amount of an investment at regular intervals.
A typical example is buying $20/$100/$250 a week or month of a given asset regardless of performance.
Over time, Dollar Cost Averaging effectively “smooths” out your purchase price and helps ensure that you’re not putting all your money in the market at the highest points for prices.
Dollar Cost Averaging demonstrates its real power in a volatile or falling market. Here, the strategy enables you to “buy the dips,” or purchase an asset at low points. Because you buy at set intervals, you will be investing when the market or a stock is down, and that’s when investors score the best buys. In other words, this approach takes advantage of long term trends to help protect your money from market volatility.
Why should I use it?
The core philosophy of Dollar Cost Averaging is maintaining good saving and investment discipline for the long-term.
The strategy aims to:
⛑ Minimize risk and volatility
😄 Remove emotions from investing
⏱ Avoid timing the market
💳 Offer a convenient way to invest without a lump sum
But, what’s it like in action?
At Donut, we did a little experiment using Dollar Cost Averaging into Bitcoin:
1️⃣ $20 a week
2️⃣ Starting 12 months ago
3️⃣ Buying Bitcoin
We looked at three scenarios:
🍏 Green — A one time investment of $1,040 made in November 2018
🎗 Gold — Dollar Cost Averaging at $20/week
️🔵 Blue — Saving $20/week for 1 year
Here we see a scenario where Dollar Cost Averaging has allowed to build up a holding passively and make a return on his investment.
That said, if the user timed the market perfectly with a one-time investment in Bitcoin in November 2018, he or she would have fared slightly better. However, this might have also required a crystal ball. And those are typically hard to find.
Repeating the same analysis over 18 months shows an even more interesting output. Here once again you can see the effect of building up holdings with Dollar Cost Averaging performing significantly better than a one-time investment.
Who uses it?
Dollar Cost Averaging is not unique to any asset. It is used across the financial industry by both Bitcoin and crypto investors as well as traditional market investors.
✅ Warren Buffet — you may have heard his name once or twice
✅ 401(k) & Roth IRAs — your parents may have bugged you about these
✅ Anthony Pompliano — preeminent crypto analyst, nickname ‘Pomp’
✅ Many institutional investors — pretty much any ‘fund’ you can think of
Dollar Cost Averaging aims to reduce the impact of volatility and as a result, the strategy may offer lower upside than a well timed single purchase as evidenced above.
Where can I learn more?
Check out the Wikipedia article on Dollar Cost Averaging along with Nerd Wallet’s explanation. Both do a great job explaining the concept and the latter includes some concrete examples that illustrate the strategy in action.
Where can I put this strategy in action?
There are a number of options where you can employ this strategy. In the traditional asset market you can use products such as Stash.
Any investment strategy puts your capital at risk 🚨.
Dollar Cost Averaging is a long-term strategy and the above information is intended for informational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. ✌️