The Concept
DCA or Dollar-Cost Averaging, this strategy involves investing a portion of your initial capital and then buying more as the price of the asset drops.#DCA
The Common Problem for Beginners
Imagine you have $100 to invest in a virtual currency and you believe it will increase in value. Your goal is for it to reach $130.
The biggest mistake many make is investing the full $100 at once when the currency is worth $100.
What if the currency drops in price? If the currency drops, say to $90, you have already used all your money and have nothing left to buy cheaper. If then the currency rises again to $100 (your initial price), you won't have gained anything, because it simply returned to the same point where you bought.
The Smart Strategy: Gradual Buying
Instead of putting all your money in at once, the strategy proposes dividing your investment and buying the currency at different times, especially if the price drops. This is called "averaging" or "consolidating."
Here’s a simpler way to view the example:
Imagine you have $100 to invest and you want to buy the currency when it is worth $100.
Initial purchase: Instead of spending the $100 at once, you decide to buy with only a part, for example, $20.
Currency at $100: Purchases for $20. You have $80 left in cash.
If the price drops, buy more: If the currency drops in price, you take the opportunity to buy more, which allows you to have a lower average purchase price.
Currency drops to $95: Buy $15 more. You have $65 left in cash.
Currency drops to $85: Buy $15 more. You have $50 left in cash.
Currency drops to $80: Buy the remaining $50. You run out of cash.
What did you achieve with this?
By buying at different times while the price was dropping, your average purchase price is no longer $100. Now it is much lower, approximately $87!
The Big Advantage of This Strategy
Here comes the interesting part:
Profit without reaching the goal: If the currency, instead of rising to $130, only returns to its initial price of $100, you would have made approximately a 15% profit on your investment, or about $15. Why? Because your average cost was $87, and if you sell at $100, you are gaining the difference.
Why is it so important?
This way of investing is crucial because:
You reduce risk: You do not put all your money at a single point, which protects you if the price drops.
You increase your profit opportunities: Even if the price does not rise as much as you expected, you can still make profits because your entry price is lower.
You control your emotions: You avoid the panic of seeing your investment drop without being able to do anything. You make logical decisions instead of impulsive ones.
In summary, this strategy is about being patient and strategic. Those who succeed in the markets are not the ones who bet everything at once, but those who manage their money wisely and seize opportunities when the market does not go as expected.