Let's talk about dollar-cost averaging, a classic investment strategy in which regular small contributions are made throughout the year ...
“This is a great strategy and should be applied to what you believe in,” says Daniel Polotsky, founder of Bitcoin ATM and financial services company CoinFlip. “Just don’t put all your eggs in one basket. You should still diversify your portfolio."
In general, experts recommend keeping crypto investments below 5% of your portfolio and prioritizing the more pressing aspects of your financial life, such as saving for emergencies, investing in a retirement account, and paying off high-interest debt.
If you are a crypto investor, here is what you need to know about dollar cost averaging and how you can apply it to your crypto strategy.
What is dollar-cost averaging
The long-term investor is characterized by a slow and steady approach to investment. This is where dollar value averaging can come into play as it helps you focus on the benefits over time rather than the ups and downs of the price throughout the day.
The strategy involves dividing investments into small parts and regularly investing them in the market. For example, if your annual goal is to invest $1,500 in Bitcoin, you would need to invest about $125 per month for a year. You can break these contributions into even smaller, but more frequent amounts, and make them, for example, every week.
Dollar-cost averaging establishes repeated purchases at regular intervals for a fixed amount in dollars and is bought at both highs and lows. For many investors, dollar-cost averaging is the most realistic and affordable way to ensure they enter the market with a lower level of risk, especially if they have a longer time horizon.
Experts agree that dollar-cost averaging is a safer method of investing in cryptocurrencies than buying and selling at the same time. This is lower risk and often lower reward but still provides an opportunity to benefit from market fluctuations.
Dollar-cost averaging, like any strategy, is only good if your investment increases in value over time. That's why Wendy Oh, a crypto investor, and popular TikToker, suggests sticking with bitcoin - the most valuable and widely used cryptocurrency - when averaging a cryptocurrency by dollar value.
“For Bitcoin, I like the dollar-cost averaging strategy because I like Bitcoin in the long run. It is one of the most stable [crypto] investments a person can make. When we talk about averaging the dollar value of altcoins, I think it carries a lot more risk,” she says.
This means buying a small number of Satoshis (1 Satoshi equals 0.00000001 BTC) at regular intervals, regardless of the current price. This helps to avoid the psychological stress of buying, say, $60,000 and then seeing the investment lose 10% of its value per day.
Advantages and Disadvantages of Dollar-Cost Averaging in Cryptocurrency
A robust approach to dollar value averaging can especially help crypto investors cope with the added risk and volatility that comes with the cryptocurrency market. It is also a way to avoid trying to "time the market", which research has shown is unlikely to be a winning strategy for investors. By accumulating cryptocurrencies over time, you are essentially neutralizing short-term market volatility emotionally and financially.
If you were to invest $100 in Bitcoin every week starting December 18, 2017, you would have invested a total of $16,300. By January 25, 2021, your portfolio would be worth approximately $65,000—an ROI of over 299%. If you had taken the same amount of $16,300 and invested it all on December 18, 2017, you would have lost almost $8,000 over the first two years. In the end, your portfolio would have recovered, but given that you did not get scared and did not sell your bitcoins at a loss during periods of decline.
But a dollar-value-averaging cryptocurrency has its drawbacks.
While averaging dollar costs help reduce risk in the event of a market crash, less risk can mean less profit. Thus, dollar cost averaging is not a strategy for maximizing return on investment, but rather a risk management strategy.
And do not forget about the commissions that crypto exchanges charge when buying, selling, or exchanging cryptocurrencies. Fees are often a percentage of a trade and are charged per transaction. Before applying this strategy, make sure you understand exactly how and when the exchange will charge for your cryptocurrency transactions and determine how much you are willing to spend on fees.
COMMENTS