Dollar-cost averaging is a strategy that might be a good option for you if you do not have a huge amount of money to invest, if you are not an expert on the markets or if you easily let your emotions take lead. Why? Because in DCA you invest a certain amount in the same asset over some period of time. You decide how much you want to invest and then, every month (or another fixed period of time) you just have to stick to your plan. There are some advantages and disadvantages to this method that we were discussing in other articles. Today, I want to tell you how to calculate your average cost.
Dollar-cost average calculations
The easiest way to explain how to calculate the average cost is to take an example. Let’s say a person wants to invest in a hypothetical QWE cryptocurrency. He is going to invest $100 over 6 months period. The price of the QWE cryptocurrency will vary which means he will purchase a different number of units each time.
From the graph above, you can read that the QWE cryptocurrency’s price varied from 21 up to 41 per share during the last 6 months. The amount invested remains the same ($100). So in the first month, when the QWE cryptocurrency cost $33, our investor purchased 3.03 units. The following month, he was able to buy 3.33 units. Consider the table below to view investments made during all 6 months.
In order to calculate the average cost, you have to divide the total sum invested by the total number of units you have bought.
The invested amount was $100. The time period was 6 months. It gives us the total cost of $600.
The number of units bought was different each month but altogether, after 6 months, our investor has 19.39 units.
The average cost will be calculated by dividing 600 by 19.39. The result is 30.94.
The average price he paid for a unit is $30.94.
The bottom line
Dollar-cost averaging carries a relatively small risk. You buy the same number of shares each month. Sometimes they will cost less, sometimes more but this method allows to reduce the average cost cause you buy more shares when the price drops.
I encourage you to check our free course on automating the DCA strategy for cryptocurrencies. With the knowledge from our course, you will be able to create a crypto DCA bot that will execute multiple trades on its own based on the parameters you enter. You may begin investing even without coding knowledge.
Wish you successful investments!