Have you ever wanted to invest in cryptocurrency, or buy a whole Bitcoin, or build a crypto assets portfolio but don’t know how to go about it? If yes, then you may want to consider the Dollar Cost Averaging investment strategy to achieve these goals.
What is Dollar Cost Averaging?
Dollar Cost Averaging is a strategy of investing fixed amounts of money over fixed intervals, for example, $10 daily, or $50 a week or $100 a month. This investment strategy is usually used by investors seeking to lower their risk exposure especially to highly volatile assets. As such, it aids in developing long term investment goals devoid of emotional influences such as greed and fear. High risk, volatility, emotions, FOMO, and FUD are all characteristic of cryptocurrency investing thus Dollar Cost Averaging provides a creative approach to investing in this new class of assets.
Dollar Cost Averaging cryptocurrencies
Investing in cryptocurrencies can be one hell of a roller coaster with sharp daily price movements, protracted bear runs, short-lived bull runs, dead cat bounces, flash crashes… etc. All of this is accompanied by relentless hype, big bold price predictions, day traders analysts, Telegram crypto signal sellers, trolling, bubble theorists, HODLers, coinmarketcap screenshots, mooning, going to zero; and this is just from your Twitter feed. This makes it virtually impossible to invest in cryptocurrency as you would other assets due to the emotional drain. As such, there is need to consider less risky techniques when investing in the sector.
The Dollar Cost Averaging is one of the techniques that could help cryptocurrency investors to set up long term investment goals and achieve them in a disciplined approach. To understand this better we conduct an illustration with real crypto prices considering these 2 goals:
-Buy a whole Bitcoin
-Build a $15,000 cryptocurrency portfolio
For comparison we review how each of these goals can be achieved by investing a lump sum amount or through Dollar Cost Averaging over a year (August 2018-July 2019).
To buy a whole Bitcoin
In the first case, the investor could have purchased a single Bitcoin for $7,604 in August 2018. Alternatively, the investor could have employed the DCA strategy by breaking this amount into monthly investments worth $633.67. The table below provides a breakdown of the amount of Bitcoin purchased each month.
As can be seen from the table above, the investor could have been able to accumulate a whole Bitcoin by the 8th month (March 2019) at a cost of $4,936. Had the client been interested in investing the whole outlay, then by the end of the year he would have accumulated 1.43 Bitcoin instead of only 1 for the initial $7,604 investment. What’s more? The investment at the end of the period (July 2019) is worth $15,157, almost double the initial investment.
To build a $15,000 cryptocurrency portfolio
Using the same period we examine how the investor could build a $15,000 portfolio either by making a lump sum purchase or using DCA strategy. For the purpose of this illustration we use the top 3 cryptocurrencies as at August 2018; Bitcoin, Ethereum, and Ripple.
From the above table, the investor would have been able to purchase 0.66 Bitcoin, 11.88 Ethereum, and 11,214 Ripple on August 2018 prices by making an equal allocation of $5,000 for each coin.
Alternatively, the client could have chosen to use the DCA strategy to build the same portfolio by breaking down it into $1,250 monthly investments. This translates to $416.67 investment per coin per month. The table below breaks down the amount of coins that the investor would have been able to buy over the 12 month period.
As seen from the table above the investor would have been able to accumulate 0.94 Bitcoin, 28.22 Ethereum, and 13,384 Ripple. This translates to an additional 0.28 Bitcoin, 16.34 Ethereum, and 2,170.37 Ripple as compared to total coins that could be obtained from a lump sum purchase. For context, the total value of this portfolio is $23,723 as compared to $15,022 worth of the lump sum purchase based on July 2019 prices.
Why Dollar Cost Averaging
Dollar Cost Averaging is not the most profitable investment strategy but rather is aimed at minimizing risk by breaking down a large sum over a defined period. This helps reduce the effect of price fluctuations and ultimately lower the average buying price. For instance, from the above illustrations, breaking down the investments over a 12 month period gives the investor average buying prices of $5,985 for Bitcoin, $209.24 for Ethereum, and $0.39 for Ripple. In a highly volatile environment like cryptocurrencies, this serves to minimize the downside risk as a result of sharp price movements.
Dollar Cost Averaging could also be a useful technique for new investors in the crypto space. As aforementioned, the crypto space is in a constant flux with an overflow of alarming news and information. This is not an ideal environment for a new investor for a very volatile asset class. Thus the DCA strategy could help temper the emotions by allowing investors to place small stakes consistently. This also serves to prevent irrational decisions such as taking a loan to invest in cryptocurrencies. It also helps the investor to gain deeper understanding of cryptocurrencies and with time, they can be able to pursue a more or less aggressive investment strategy based on their knowledge. This way they are able to build a desirable crypto portfolio in the long run.
Most investors seeking to maximize profits always aim to buy the bottom and sell at the top. However, timing these moments has become an insurmountable task, more especially in the crypto space. As such, investors should be encouraged to try other approaches. Dollar Cost Averaging does in no way guarantee profits or better return that buying in lump sum. However, it serves the purpose of eliminating emotions in investing and enforces discipline on the investor.
With DCA strategy, an investor is forced to maintain a constant dollar amount each period. This means one purchases more coins when prices are low and fewer when prices are high. This serves to overcome fear by forcing the investor to buy more when prices are declining and overcoming greed by preventing one from making risky financial decisions like mortgaging their house or taking a loan to buy coins when prices rise significantly. According to C.J. Brott, founder of Capital Ideas, both actions go totally against human nature and provide that level of boredom that usually accompanies successful investing strategies.
This article does not constitute financial, investment, or trading advice and should not be treated as such. Not part of this article should be considered as an offer to buy, sell or hold a cryptocurrency. Cryptocurrencies are very volatile and a highly risky asset class. You are advised to Do Your Own Research and consult your financial advisor before making any investment decision. Coinweez will not be held responsible for the investment decisions you make based on the information provided in this article.