Binance founder Changpeng Zhao (CZ) has once called attention to dollar-cost averaging, which is better known as DCA.
CZ told his followers that understanding DCA is essential for anyone hoping to build wealth through investing.
“DCA (If you don’t know the term, better google it. You can’t get rich without knowing some basic financial terms),” CZ wrote.
The comment came after a discussion about the best time to enter the market for long-term investors: during a bull market or a bear market. CZ has repeatedly argued that trying to perfectly time market bottoms is extremely difficult.
The Binance founder has promoted DCA for years. In a 2023 post, for instance, he explained that investors who want to “buy low, sell high” must actually be willing to buy when markets are depressed.
It’s just simpler
He has also previously responded to Bitcoin advocate Michael Saylor’s posts about accumulating Bitcoin, saying that “DCA works” and “DCA wins.”
Dollar-cost averaging is an investment method where someone invests a fixed amount of money at regular intervals without paying attention to the asset’s price. The investor spreads purchases over weeks, months, or years.
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For example, someone investing $500 every month into Bitcoin will buy more Bitcoin when prices are low and less Bitcoin when prices are high. If Bitcoin falls from $100,000 to $50,000, the same $500 investment buys twice as much Bitcoin.
The main reason DCA has become so popular among crypto investors is that it removes much of the emotional aspect of investing. Investors frequently become overly optimistic during bull markets and overly fearful during crashes. This emotional cycle frequently leads people to buy after prices have already surged and sell after prices have already collapsed.
DCA obviously reduces the risk of entering the market at the wrong moment, but it doesn’t completely eliminate it.
It is important to stress that DCA is not a guaranteed path to profits. One of its biggest downsides is that it can underperform lump-sum investing during euphoria-induced bull market phases.
DCA also does not protect investors from choosing the wrong asset. Obviously, the strategy works best for assets with long-term potential.
Psychological discipline is yet another major issue. DCA does not sound so simple at all when you have to stick to this strategy for years.
Still, historically, DCA has produced strong returns for investors who applied it to major assets such as Bitcoin over long periods.
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