There are probably some noble investors out there who got into crypto purely for love of the tech. They saw the world-changing potential in the blockchain, and they selflessly donated their money to the cause. If they made a little on the side, that was just great.
The vast majority of investors, however, came because of the eye-popping gains. Visions of becoming a Bitcoin millionaire and turning a few bucks into a new Lamborghini danced through their heads. Some unfortunates reportedly maxed out credit cards during the last bull run in December, anticipating monthly gains would outpace their minimum interest payments. And then the market absolutely tanked.
There is still a power of money to be made in crypto. But the very thing that attracted so many new investors to the market – wild price swings – is absolute murder for a serious investor. The market is too new to have many established patterns or tried-and-true methods. Believe it or not, everyone is just kind of guessing what coins or tokens will take off next. Practiced folks have a better general idea than casual investors, but no one has a crystal ball.
Luckily, some of the staid old rules of investing still apply. Using a dollar cost averaging (DCA) strategy can help minimize crypto investing risk.
Smoothing the Graph
A DCA strategy works on the assumption that the market you’re investing in will always, eventually, rise in value. The goal is to get money into that generally rising market at measured points along the upward trend timeline, producing a livable average buy-in cost. DCA takes most of the guesswork out of crypto investing. There’s no need to time the market or fret about whether you bought at a peak or a trough. Small investments spread out over time yield an average buy-in price that smooths the graph, so to speak.
Picture an ideal crypto price graph from CoinMarketCap, with a timescale of two years. It should look jagged but generally pointed up. Now draw a mental line from the start of the line to the end, cutting straight through the price dips and surges. That’s the line a DCA strategy is concerned with.
Low Risk, Low Reward
A DCA strategy is boring. It’s the difference between working a job at the bank and robbing said bank That’s perfectly all right. Even the modest gains realized thus far in the crypto sector are beyond the wildest dreams of Wall Street or other traditional investing outlets. There’s nothing wrong with taking a low-risk, low-reward approach in a market that’s practically guaranteed to display long-term growth. And there’s virtually no chance of getting shot at, unless you happen to be John McAfee.
The first thing to do is set a budget and a timetable. How much money do you want to put into the market and over what span of time?
The first number can be arbitrary – no more than you are comfortable losing. Don’t max out credit cards for crypto investing cash.
The second should be considered on the scale of weeks, months, or quarters, even in the lightning-fast crypto world. It’s easy to feel like a hot-shot trader, hitting “refresh” rapid-fire on your browser to watch your crypto coin of choice dance throughout the day. Don’t do that anymore. You’re taking the long view.
Once a budget and a timetable are set, payments must be divided into equal portions and regular buys made. This is perhaps the hardest part of the DCA. Buys must be made according to your schedule, even if you think that jagged line is about to take a sudden plunge or shoot to the moon. Remember, it’s not the jagged line you’re concerned with; it’s the smooth, narrow path to profit.
It is inevitable that your investment will feel wrong at times. You will, by design, be leaving money on the table in obvious bull markets, and you may miss out on some fantastically low buying opportunities.
But resist the temptation to apply hindsight to your investments. If you or anyone had a crystal ball, you surely would have used it by now.
What to Buy?
So, we’re going to buy measured amounts at regular intervals over a long period of time. This will bring our average cost per coin down while still getting enough fiat into the system to start realizing gains.
But what coins, in particular, are good fits for this strategy?
All of them. Not in the sense that all coins are good investments, but in the sense that the more diversified your portfolio, the greater your chance of succeeding.
An established coin, like Bitcoin, can be expected to slowly gain in value over time. Some of the more exotic coins might fail, and some might rocket up in value. By spreading your measured buys over a large coin spectrum, you’re applying the time element of DCA to the investment itself.
Say you invest in coins A, B, and C. A is a lumbering old coin with a clear use case, established tech, and a solid team. The thing is, it already sowed its wild oats and is now more or less just puttering along in the market. B is a brash young heartthrob. It’s got virtually nothing going for it right now but hype, but the hype is absolutely amazing. Then there’s C. C is a personal favorite of yours. It doesn’t have the verve of B or the houndstooth-jacket respectability of A, but you really believe in its potential.
Go ahead and spread your budgeted investment across all three coins. It’s entirely possible that A might upend in the long-term view you’ve taken. B might close up shop, while C could exceed your wildest expectations. Spreading the investment over a wider portfolio smooths out those peaks and troughs in the same way that spreading it over time does.
If you’re not convinced, check out this hypothetical investment. If you had invested $10 in each of the top 100 coins on CoinMarketCap in January 2017, you’d have made $18,000 on your $1,000 investment within six months.
Of course, it’s important to remember the long-term aspect of DCA. If you’ll observe on that hypothetical investment, it’s currently in the red while the market struggles through a historic trough. Such is the Wild West of crypto.
A DCA is a safe bet for markets that you think will generally trend upward over a long period of time, which most folks agree describes cryptocurrency. It will not fulfill the wild Las Vegas, get-rich-quick fantasies you might have had when you first saw a coin make quadruple-digit gains in a week. It will, however, ensure that you have a toe in the water in good times and bad.
The theme here is consistency and discipline. Religiously stick to your buying schedule and timetable, even if you have a hunch the market is about to do something crazy. Remember, trying to guess the market is anathema to the DCA strategy. You’re running a marathon, not doing wind sprints. By the end of your investment timetable, you ought to have an average buy-in cost that won’t leave you sweating every market downturn. You may even have a little profit in your pocket.