Your New Crypto-Hedge: Dollar-Cost Averaging
Dollar-cost averaging is a widely used strategy in traditional investing. Here we look at what it is and how the same principle can be applied to Bitcoin and other crypto trading.
What is dollar-cost averaging?
Some investors prefer to wait for a stock to bottom out before buying, so they can profit when it grows in value. To manage this successfully, you must time the market, which isn’t always easy.
Someone using dollar-cost averaging will buy the same value in a stock or fund on the same day every month, regardless of its share value. This transaction can be automated, and we’ll see how that can be done with crypto using Skrill’s Reserves feature.
If you have a certain amount to invest, the biggest risk comes from spending your whole investment pot on a stock when it’s high, which can result in a large loss.
This risk can be reduced with dollar-cost averaging, because purchases are spread over highs, mediums and lows. In short, negative effects of a volatile market are ironed out.
Who is it for?
The typical user of dollar-cost averaging is a risk-averse investor. That’s because downward trends in a stock will hurt less and less on the way down, as the investor will be getting more shares for their money each month.
Should the value then rise, they will hold more equity and therefore get greater profits than the investor who spent an equal amount but when the value was high.
A passive investor, who believes in the long-term success of an investment could use this method too. It’s also a handy method of investment for anyone on a salary, who wants to put a little into a fund after each payday.
Applying dollar-cost averaging to cryptocurrencies
Dollar-cost averaging isn’t just for stocks – it can be used for any investment, including buying cryptocurrencies.
Many people find the approach helpful when trying to make a profit – or minimise losses – from buying and selling cryptocurrency. That’s because the inherent volatility of crypto over short periods of time makes it difficult to pick the “perfect” time to buy a currency.
If the long-term trajectory of a cryptocurrency is upwards, your multiple small purchases will be worth more when you decide to sell than they would have been had you made your purchase at a relatively high point in its valuation.
How does dollar-cost averaging work?
The simplest way to use dollar-cost averaging for cryptocurrencies is to set up a crypto reserves option in your crypto account, like the function Skrill has.
All you need to do is instruct Skrill to purchase your chosen value of a cryptocurrency at a given time, and to repeat that purchase with the frequency you choose.
Automating the process not only makes it simpler; it also removes the temptation to wait for the value to drop further before making the purchase – often the exact moment it starts to rise!
You can deactivate the option at any time.
Deciding if the strategy is right for you
Volatility is one of the qualities of cryptocurrency that puts some investors off.
But by spreading the risk over several weeks or months, any downward movement is mitigated by the fact that you’ll be getting more of the currency each time you make a purchase. And in the longer term, that’s more valuable.
That said, the opposite is also true – if the value starts on an upward trend that continues for months, you’d have been better off putting more money in when it was low rather than spreading it out.
But dollar-cost averaging isn’t about making those kinds of time-sensitive judgements – it’s about investing in the long-term performance of a cryptocurrency that looks promising to you.