We all know the tortoise beats the hare by maintaining a slow and steady pace and being consistent in his progress toward the finish line. There’s a cryptocurrency investing strategy that’s similar to that winning approach: dollar-cost averaging.
Dollar-cost averaging (DCA) enables you to increase your exposure to cryptocurrency slowly over time instead of all at once. This, in turn, can help reduce the risk associated with asset volatility while building wealth consistently over time.
Win Without Swinging for the Fences
Dollar-cost averaging has long been popular among mutual fund investors saving for retirement. Today, it’s gaining traction in the crypto space largely due to pricing volatility among crypto assets and the desire of many investors to reduce the potential impact of sudden market shifts.
Of course, volatility can work in a crypto investor’s favor when they’re able to move quickly—buying during a dip and selling at a spike. But that’s easier said than done. For every active crypto investor who has struck it rich by buying low and selling high, there are others who’ve missed their chance to take advantage of volatility.
Using DCA reduces this risk, because instead of trying to predict when crypto markets will move up or down, you buy a set amount of cryptocurrency at regular intervals and hold onto it for the long term. In other words, the goal isn’t to hit home runs at the risk of striking out, but instead to hit a bunch of singles that eventually score more runs and result in fewer outs than swinging for the fences every time.
Use Recurring Trades for Dollar-Cost Averaging
Implementing dollar-cost averaging as part of your cryptocurrency investing strategy is relatively simple. To do it, you’ll need to set up recurring trades in which a fixed dollar amount of crypto assets is purchased on your behalf automatically on a regular basis. The assets are purchased at these regular intervals regardless of their price. At BlockFi, we make it easy to set up recurring trades at daily, weekly, or monthly intervals.
Using DCA to invest in cryptocurrencies can be less stressful and time-consuming than actively buying and selling assets and trying to guess where the crypto markets are going. For example, you don’t have to constantly watch the crypto charts or set price alarms to catch rises and dips in price. You’re investing in cryptocurrencies for the long term, so short-term price volatility is less important for your overall strategy.
The Law of Averages
Another benefit of investing in cryptocurrencies using DCA is that you don’t have to transfer funds to an exchange or leave funds on an exchange for faster trades. You can hold your assets and only transfer them when you’re ready to sell.
In addition, using dollar-cost averaging to invest in cryptocurrency can lower the average unit cost of the crypto assets you buy. For example, suppose you have $8,000 that you want to invest in crypto and the current price of the asset is $10. If you invested the entire amount now, your unit cost would be $10.
Instead, you could set recurring trades that allow you to invest $1,000 a month over eight months at the following unit prices:
- August: $10
- September: $13
- October: $8
- November: $12
- December: $9
- January: $7.50
- February: $8.50
- March: $10
After eight months, you will have paid a total of $7,800, or $9.75 per unit, compared to $8,000, or $10 per unit, if you had invested the entire lump sum in August.
The Perils of Prediction
While many investors believe they can outsmart the market, the fact is that it’s very difficult, if not impossible, to consistently time responses in order to buy and sell at the optimum points unless you’re willing to treat it like a full-time job—and it’s challenging even then.
For a longer view of market trends, lower risk exposure, and a less intensive approach to buying and selling, dollar-cost averaging might be a smart idea. And at BlockFi, we can help you build out your DCA strategy with our easy-to-use recurring trades feature. So if you’re ready to outlast the hare, try setting up a recurring trade today.Last updated on