Core Question

Breaking down DCA.

What is dollar cost averaging

Dollar cost averaging (or DCA) is essentially a buying strategy that has been praised by many. It basically tells you to buy a fixed amount (like $100) every fixed period of time no matter what (like every week). This will smooth out the bumps, because on days where it is high, you buy less, but you stock up more on days when it is lower (the price).

The drawback

First, let me start by saying this: I don't really think DCA is the best way to buy. However, I will try to stay objective in this post.

When it comes to the drawbacks of DCA, there a few that I can think of. However, the one I always use when trying to talk people out of DCAing blindly, is you lose out. What I mean by that is say you have your plan of $100 every week, no matter what, without buying in other times or buying more. By strictly abiding to your rule, you will probably end up buying at a time where the price is at its highest after a massive bull run. But, you will still buy because of DCA. 

After the massive bull run, assets will historically correct themselves by having a few down days. That means that you just bought assets during the worst possible moment, which is at its peak.

Now, on the flipside, say it just has a massive bear market. You would still only buy $100, even though you should be buying more. Even if an asset drops say 10% in a day, you would still follow a rigid plan, instead of adapting, which is what sort of holds you back. However, this only applies to large cryptos or assets like BTC, ETH, BNB, SOL, and stocks and index funds like Apple, Nvidia, SP500. If you are investing in stuff like memecoins, then, you shouldn't even be investing in it, unless for a bit of fun with like $20.

What I'm getting at

What I'm trying to hint to you is that you should never follow a rigid DCA. Instead, follow it, but more loosely. One of those ways could be setting a buying range every x period of time. That could be buying anywhere from $50 to $250 every 2 weeks. Now, when you see that the asset has just been gaining positively for days and days, then you should either buy some ($50) or save. Oppositely, if it has been losing in the red and it is not a memecoin or a low marketcap asset or stock, then you should buy more (like $200 or $250). 

Something you should keep in mind is that during the green day streaks, the reason you still want to buy is in case it doesn't correct. For example, back in 2024, gold surged from below $2000 an ounce to over $2100. People didn't buy but held out, but gold didn't correct, instead it kept rising. So, they missed out purely because they were expecting the price to drop back under $2000, but it didn't ever really do that. They were then stuck buying at above $2500, missing out on over $500 profit an ounce just by waiting.

So, the takeaway here is, you should follow DCA, but define it with some flexibility over just saying I'm buying $100 every week no matter what.

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