If you're not a complete newbie in the cryptocurrency world, you are probably well aware of the crypto market volatility. This means that investing in Bitcoin, and even more in other cryptocurrencies is highly risky but can also be higly rewarding.
Now, if you are a trader coming from "traditional" finance, the first approach to crypto market could be very unsettling, however your experience will probably make you understand how to manage its volatility quickly. Instead, if you are a first time investor, you could fall in the trap of betting instead of investing. This gets even worse if you manage to catch a bull market and with a couple right investment you earn more than you initially invested, soon feeling like you're the king of trades.
This feeling could soon make you over-confident and you could lose a good part of your investment in a hurry.
A good strategy to mitigate this market volatility, still providing you the benefits of the constantly-growing crypto market is Dollar-Cost Averaging (DCA).
Definition of DCA
Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals. In effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices. Dollar-cost averaging is also known as the constant dollar plan.
Source: Investopedia
BTC 2021 Example
This is the last 3 months trend of BTC price. As you can see, there a lot of ups and downs, but the trend is upward.
If we created a DCA strategy buying 100$ worth of BTC every 2 weeks starting with 1st Jan 2021, these would have been our trades (on average):
So we have spent a total of 600$ and our current BTC position is valued about 866$ (+44%).
Since 1st January, BTC went +96%, so if we had bought 600$ worth of BTC on 1st Jan, we would have done a much better gain, so it seems like our strategy is not paying dividends!
BTC 2018 Example
Now let's take another example: the BTC price trend for the first 6 months of 2018 and apply this same strategy. A lot of ups and downs here too, but with a downward trend.
So if we assume today is the 30th Jun 2018, we have spent a total of 1200$ and our current BTC position is valued about 857$ (-28%).
Since 1st January, BTC down -54%, so if we had bought 1200$ worth of BTC on 1st Jan, we would have done a much worse loss! This time it seems like our strategy is a lot safer.
Wrapping Things Up
DCA is a nice strategy if you want to avoid peaks and valleys and you believe in a long-term growth of your assets. It is still quite valuable in a bull market, and it protects you in a bear market.
With Coinbase, you can easily set a recurring buy weekly, monthly or every 1st and 15th each month. If you're new to Coinbase, you can register using my referral here and you will get 10 USD for free on your first 100 USD invested on the platform.
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Disclaimer: this is not an investment advice. Do your own researches before investing in cryptocurrencies.
Thanks for reading, let me know what do you think about it in the comments and feel free to share your experiences!
