What is DCA? A guide to the dollar-cost averaging investment strategy

What is DCA? It is a smart investment method that helps investors reduce risk when buying during periods of significant price volatility. With the DCA (Dollar Cost Averaging) strategy, you divide your investment capital into equal parts and make periodic purchases over a long period.

The key difference between DCA and other strategies is that this method does not aim to hit the market bottom or predict exact price movements. Instead, DCA helps you achieve an optimal average price by buying regularly. This is especially useful during periods of strong market fluctuations. Note that DCA works best when the market is volatile within a wide price range, not when it is sideways.

How the DCA Strategy Works

When you use DCA, you do not invest all your capital at once. Instead, at each interval (weekly, monthly, or other cycles), you invest a fixed amount of money. This approach offers a major advantage: when the price of the coin drops, your fixed amount can buy more tokens; when the price rises, you buy fewer tokens but still invest consistently. As a result, your average purchase price will be lower than investing all at once initially.

The main benefit of this strategy is reducing panic during market downturns and avoiding FOMO (fear of missing out) during rapid price increases. You follow a fixed plan instead of trying to time the market perfectly.

Formula and How to Calculate the Average Price of DCA

To calculate the average price of your periodic purchases, use this formula:

DCA Average Price = (Price1 × Quantity1 + Price2 × Quantity2 + … + Pricen × Quantityn) / Total Quantity Purchased

This formula helps you determine the average price paid for your entire investment.

Real-Life Example: Periodic ETH Purchases Over 6 Months

Let’s look at a specific example to better understand how DCA works. Suppose you decide to invest $10,000 into ETH at the beginning of each month for 6 consecutive months. The ETH prices each month fluctuate as follows:

• Month 1: $1,000/ETH → 10 ETH purchased
• Month 2: $800/ETH → 12.5 ETH purchased
• Month 3: $1,300/ETH → 7.7 ETH purchased
• Month 4: $600/ETH → 16.7 ETH purchased
• Month 5: $1,000/ETH → 10 ETH purchased
• Month 6: $1,500/ETH → 6.7 ETH purchased

After 6 months, you have spent a total of $60,000 and bought 63.5 ETH.

DCA Average Price = (1,000 × 10 + 800 × 12.5 + 1,300 × 7.7 + 600 × 16.7 + 1,000 × 10 + 1,500 × 6.7) / 63.5 ≈ $946.14/ETH

Compare this with a different scenario: if you used the entire $60,000 to buy ETH at the first month when the price was $1,000, you would only get 60 ETH. But by applying the DCA strategy, you acquired 63.5 ETH at a lower average price ($946.14 vs. $1,000). That’s the power of averaging — you get more tokens at a lower overall cost.

What is DCA in practice? It’s a patient, practical, and effective way to build your investment position without worrying about perfect market entry timing.