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August 10, 2022

What is Dollar Cost Averaging?

Dollar cost averaging, which I'll call DCA for the remainder of this post, is a great example of overly complicated investing jargon that makes it difficult for people to get started investing. The concept of DCA is actually incredibly simple. All that it means is that someone invests a certain amount of their funds at constant intervals over time. For example, imagine I have $100. I could dump the entire $100 in the market at the current price, or I could invest $10 over a period of 10 months.

Now, the question is why would I split up my investment rather than just investing all of it at one time? To explain, let's go through this example more in depth. Let's assume that we are buying into Bitcoin with our $100 from the previous example. I'm going to simplify this example by assuming we are only going to buy in 4 times. If we buy in at one time we might buy in at a price of $30,000, but if we buy in 4 times then we might buy in at $31,000, $30,000, $29,000 and $28,000. If we average these 4 buys then it comes out to $29,500. This means that our averaged buy in price was only $29,500 which is a more favorable position than buying in at $30,000. As you can see, DCA allows us to average our buy in price to get a lower averaged buy in price rather than if we bought in with a lump sum.

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