Cryptocurrencies, just like stocks and other financial assets, are faced with a high degree of volatility. The price fluctuations of financial assets pose a serious cause of concern for investors and crypto traders, since it determines how profitable their investments would be.
In December 2017, a person who happened to purchase bitcoin during the peak of the 2017 bitcoin bubble tweeted, “I took out a $75,000 mortgage, put it all in bitcoin (at $19,442) and right now I have $48,639 left!!!!” In an attempt to harvest colossal profit from his crypto investment by investing all of his money at once, the 2017 bitcoin value crash, which depicts the unpredictability of value fluctuations, left him in a pool of financial loss.
This illustrates how bad the volatility of cryptocurrencies and other financial assets can be for an investor. A lot of times, investors try to time the market and predict when the time is right to put in all of their money into an investment. However, this has proven, countless times, to be a flawed strategy. Although this may result in wins for the investor at times, this lump-sum purchase strategy is not always advisable.
An alternative to making lump-sum purchases
Posing as a safer alternative to making lump-sum purchases, an investment technique known as dollar-cost averaging makes investment purchases less influenced by price volatility, for long-term gains. Dollar-cost averaging is simply an investment strategy that involves purchasing stocks or cryptocurrencies, as the case may be, at regular intervals, in approximately equal amounts. This contradicts the traditional belief of “buying low and selling high.”
Dollar-cost averaging can be applied to the purchase of stocks or cryptocurrencies. In purchasing stocks, for example, if you have a sum of $10,000 for investment in stocks, and instead of making a lump-sum purchase, you decide to spread it equally across 5 purchases at share prices of $50, $40, $30, $60, $80. This would translate to $2000 worth of shares for each purchase, thereby, yielding 40 shares (2000/50), 50 shares (2000/40), 66.667(2000/30) shares, 33.333 shares (2000/60) and 25 shares(2000/80), totalling 215 shares at the end of the fifth purchase.
This gives a substantial increase over a lump-sum purchase at the entry point of $50 per share which would have yielded 200 shares, in contrast to the total of 215 shares from splitting the purchase across five intervals. This kind of investment strategy helps investors to cushion the effects of market fluctuations and high risks, especially in cases where the market may navigate a course that is highly detrimental to an investment, like the 2017 BTC bubble crash.
Dollar-cost averaging for Bitcoin
Considering the high variance in the value of bitcoin over time, dollar-cost averaging can prove to be a handy strategy for purchasing bitcoin. Instead of waiting for the right moment to buy bitcoin, you can just apply dollar-cost averaging. The underlying principle remains unchanged; a crypto investor buys a fixed amount of BTC at a regular interval, regardless of the price of BTC. This means that the investor gets to purchase more BTC when the price is low and less BTC when the price is high, but the amount of money that is used to make these different purchases is always fixed. This can be done via a variety of apps.
In Square’s Cash App, an Auto Invest feature exists, to make it possible to apply dollar-cost averaging for purchasing BTC. The feature allows users to enjoy automated BTC purchases at fixed time intervals. All the user need to do is set the amount and the time interval and forget about it. The purchase would be made automatically on behalf of the user.
Coinbase also offers a Recurring Purchases
feature which held users utilize crypto market volatility in their favour. To enjoy this feature on the Coinbase mobile app, users will need to:
- Set the asset they would like to purchase
- Enter the amount they want to buy
- Click on one-time purchase
- Select the frequency at which they purchase should be repeated
- And Select Buy now to complete the process
With the Luno app, the dollar-cost averaging strategy can be automated with the Repeat Buy Feature. Via the Repeat Buy Feature, users can create a schedule through which a set amount of cryptocurrency is automatically purchased at regular intervals.
The application of dollar-cost averaging in cryptocurrency purchases is not only limited to Cash App, Coinbase and the Luno app. Other apps that support dollar-cost averaging are equally available on the market