Nick Chong · 1 week ago · 2 min read · Insights via Grayscale Investments
Dollar cost averaging: an investment strategy for the HODLer
In 2018, the Dutch Bank ING conducted a survey on which about 15,000 respondents across Europe, North America, and Australia provided insights into their thoughts on cryptocurrencies. In Europe, 66% of respondents have heard about cryptocurrency, 9% of respondents owned some crypto, and 25% of respondents planned to own some crypto on the future. In the U.S., 21% of respondents plan to buy some crypto in the future and 15% of Australian respondents plan to buy crypto in the future.
Interestingly, the main concern people have about investing in cryptocurrency is not why, how, or where to buy cryptocurrencies. The main concern that potential cryptocurrency investors have is WHEN to buy cryptocurrencies.
Cryptocurrencies are incredibly volatile, and the volatility makes it hard to know if you are buying at undervalued, overvalued, or fair prices. This piece introduces you to a traditional Wall Street strategy that can help you even out the risk of volatility in your cryptocurrency investment.
Introducing Dollar Cost Averaging
Dollar Cost Averaging is the intentionally strategic decision to purchase the same dollar amount of a cryptocurrency at predefined intervals irrespective of whether the price of that cryptocurrency is trading up or down at such intervals.
Many people who are familiar with investments in stocks and other traditional assets have been trained to buy assets when the price is low and to sell the asset when the price is high. This is sound advice for traders, but it could set you up for an emotional rollercoaster ride if you are planning to invest in cryptocurrencies for the long-term.
At the start of January 2017, Bitcoin was trading a little over $1000 and the market was polarized on whether it was undervalued or overvalued. By the end of 2017, the price of Bitcoin had skyrocketed to trade a little under $20,000. However, Bitcoin lost most of that gain the bear market of 2018 as its price plummeted to around $3,700 by the end of last year. 2019 is already underway and Bitcoin has managed to record a 171% year-to-date gain from around $3800 at the start of the year to more than $10,300.
From the above, the volatility of the market would have been incredibly difficult to determine if the price of Bitcoin was undervalued or overvalued at any time in the last three years to execute the traditional buy-low, sell-high strategy. Accumulating cryptocurrencies with DCA however, helps you to even out and average out the highs so that the volatility doesn’t adversely affect the number of coins in your portfolio.
How to Get Started with Dollar Cost Averaging
Cryptocurrency traders and investors will typically buy their crypto holdings from exchanges that might be P2P, centralized, or decentralized. Most cryptocurrency exchanges such as Binance and Bitfinex are built specifically for traders. Hence, you’ll need to go out of your way to use DCA to purchase cryptocurrencies on short exchanges.
Skrill is one of the few platforms built specifically to make it easier for investors to leverage dollar cost averaging in their cryptocurrency purchases. Skrill, founded in 2001, has established itself as a global player in the financial services industry. The firm is headquartered in London and has offices throughout Europe and the US. It also has more than 500 staff representing more than 30 nationalities.
The company has built core competencies is developing global payment solutions for business and pleasure to enable financial transactions such as depositing funds on a gaming site, buying stuff online or sending money to family and friends.
In the crypto space, Skrill made its debut last year with the launch of its crypto tab feature as it incorporates the emerging asset class into its core business. By utilizing its existing rails, Skrill enables users to buy and sell cryptocurrencies through its platform with dollar-cost averaging.
To start, users are required to open an account and deposit funds to it, navigate to the Crypto tab, select the cryptocurrency they wish to purchase. You’ll then input how much to spend on the coin purchases and at what intervals. Skrill’s automated algorithm then activates the DCA strategy to execute the accumulation for the user without requiring any active participation of the user.
Coinbase is another platform through which cryptocurrency users can utilize dollar-cost averaging on their crypto purchases. Coinbase is a well-known player in the cryptocurrency market having been ranked as the highest-funded Bitcoin Startup and largest crypto exchange in the world as far back as 2013.
Coinbase’s Recurring buys is designed to enable users to purchase cryptocurrency slowly over time with scheduled purchases daily, weekly, or monthly.
If you are investing in cryptocurrencies for the long term, your entry and exit to the market shouldn’t be as stressful as the experience of people day trading or using other intra-range strategies. For one, you won’t need to worry about watching charts all the time, setting price alerts, and trying to catch crests and troughs in the market.
Nonetheless, DCA tends to deliver the best accumulation gains during a predominantly bear market and it might not necessarily be the best market entry strategy in a predominantly bull market. However, when you account for the general day-to-day volatility of the market; you’ll most likely be better off with DCA than making a single lump sum investment in cryptocurrencies.
Posted In: Trading