The Power of Dollar Cost Averaging

Although cryptocurrencies are a new asset class and are behind the potential disruptive technology of blockchain, when it comes to investing there are a number of key strategies that should be used due to the way financial markets function. One of the most fundamental strategies is called Dollar Cost Averaging. Dollar Cost Averaging is the strategy of buying an particular asset on a periodic basis for a prolonged period of time. You should also use around the same amount of funds on each purchase. This allows you to scale into a position that averages to a cost basis around the longer term movement of that particular assets. It acts as a hedge against price action going against your investment immediately after purchasing it.

To show how this works, I will share my #STEEM purchases during the first quarter of 2018:

As we know, the price action was lower which made me purchase at lower prices on the way down. However, you can quickly realize how this strategy could potentially be helpful. My overall average cost is $2.78 per #STEEM. If I use a current price of $3.55, you can see that my position is up about 28%. However, if I would have invested my full amount of fiat at the first purchase (at $3.90), I would have a 9% loss at this moment. Clearly a worst position than I am in right now.

Another perspective is what would have happened if the price would have went up. Certainly, investing more at a starting point when at asset goes up in price represents the best option but from a risk management perspective, by dollar cost averaging you could still participate in rising prices. So there is an opportunity cost in the case an asset goes up in prices. However, given the volatility seen in cryptocurrencies, risk management strategies should always be the best option.

Another example to show the benefits of dollar cost averaging is that it stabilizes your average cost basis to protect against volatility. So, in a declining market it would make your breakeven closer to reach if the price goes back up and in a rising market, it will make the breakeven higher. To see as an example, see my purchases from above in a chart from coinmarketcap.com:

As you can see, given the declining prices in Q1 2018, my average cost is $2.78. This shows that my breakeven is lower now than if I would have only purchased at the first price point of $3.90. Instead of needing a higher percentage increase to get to breakeven, I am actually positive now. Much better from my perspective.

As you can see from above, the value of the strategy is that as an investor you do not need to worry about investing at the top of the market or trying to decide when to get in or out of the market. Remember, it is virtually impossible to really time the market so strategies that work around timing work best; particularly when in an asset class that is so volatile.

What are your thoughts of this strategy? Does it convince you as a good risk management approach? Please let me know your thoughts. I look forward to engaging with you on this subject.

Follow me on Twitter: @NAICrypto

Don’t forget to vote, comment, follow, resteem and browse my channel for more information!

If you are like me and interested in continued personal growth, invest in yourself and lets help each other out by leveraging the resources they provide by using my referral link:
https://www.minnowbooster.com/referral/530636

DISCLAIMER: The information discussed here is intended to enable the community to know my opinions and discuss them. It is not intended as and does not constitute investment advice or legal or tax advice or an offer to sell any asset to any person or a solicitation of any person of any offer to purchase any asset. The information here should not be construed as any endorsement, recommendation or sponsorship of any company or asset by me. There are inherent risks in relying on, using or retrieving any information found here, and I urge you to make sure you understand these risks before relying on, using or retrieving any information here. You should evaluate the information made available here, and you should seek the advice of professionals, as appropriate, to evaluate any opinion, advice, product, service or other information; I do not guarantee the suitability or potential value of any particular investment or information source. I may invest or otherwise hold an interest in these assets that may be discussed here.