What is Dollar-cost Averaging?

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  • Dollar-cost averaging is the best wavy for amateur investors to re-enter a market
  • It is a simple process that all but eliminates risk of missing a move
  • It is the inverse of staggering your sells in an upward move

There are a number of ways in which an investor can buy back into a market when they suspect it is heading down, but the best way for most amateur inventors is dollar-cost averaging. In this piece we examine what dollar-cost averaging is, how to do it and why it is the best policy for most people.

What is dollar-cost averaging?

Dollar-cost averaging isn’t anything to do with the dollar specifically, and can apply to your local fiat currency. It is simply a way of layering bids for an asset down to the level at which you think it might bottom out, placing bids at intervals at a weighting of your choosing.

What is its purpose?

The purpose of dollar-cost averaging is to make sure that you catch at least some of a downwards move rather than putting 100% of your bid in one place. Doing so means you risk missing out on the entire move, whereas with dollar-cost averaging you won’t miss out even if your bottom bid isn’t met.

How does it work?

First, identify where you think your chosen asset will bottom out (let’s use Bitcoin at $14,000 for example). You place 25% of your capital at $14,000 and stagger the rest up towards $20,000, say at $1,000 intervals. This means that 75% of your capital will be deployed to catch bids all the way down, making sure that you catch the ‘meat’ of any move.

Safety First

Dollar-cost averaging into an asset is the exact opposite of staggering your sells on the way up, with the same principle in mind – making sure you execute your desired move with minimal risk. The disadvantage with this approach of course is that you won’t get maximum value at either end, but very few people can pick an absolute top or absolute bottom anyway, and you eliminate the risk of missing out.