Dollar Cost Averaging

Dollar Cost Averaging is a popular investment strategy that can be effectively used to build a position in an equity or investment. The advantages of Dollar Cost averaging are many, and in the context of investing in Cryptocurrencies, can be an excellent way to build a position in coins high-dollar coins like Bitcoin (BTC) and Ethereum (ETH).

A major concern, particularly for new investors, is a lack of resources. While investing a large, lump sum of money, can be an impossibility, Dollar Cost Averaging breaks a large lump sum down into smaller, consistent investments. Dropping $1500+ for a single Ethereum coin can be risky, even if the investment itself is not burdensome. Cryptocurrencies have historically been very volatile and a large lump sum investment can quickly lose value, even if it gains over time.

As an investment strategy, Dollar Cost Averaging solves both of these issues. But first, what is dollar cost averaging?

Dollar Cost Averaging is an investment strategy in which an investor breaks up the amount they wish to invest into smaller, equal amounts of money and invests each of these pools over time at specific intervals. For example, instead of investing $1500 at one time, an investor might opt to Dollar Cost Average and invest $500 a month over a three-month period. Or, $100 a month over a 15-month period. The important thing here is to be consistent and disciplined; to follow the strategy all the way to its conclusion. Most, if not all, crypto exchanges will allow regular, automatic investments. This is a great way to set up a Dollar Cost Strategy, set it, and forget it.

Inevitably, if an investment is being made periodically, the price of the underlying investment will fluctuate. This means that with each monthly investment, the investor is picking up a different amount of shares/ number of coins. While uncertainty is considered a negative attribute in a financial market, the uncertainty of an investment’s future value is one of the things that makes Dollar Cost Averaging effective.

Dollar Cost Averaging allows investors to build savings and value over a period of time. Frequent and consistent investments, even small ones, add up over time. An investor might not be able to invest $1500 to buy a coin of Ethereum, but they may be able to afford $100 a month for 15 months.

Dollar Cost Averaging also aims to reduce the impact of volatility in the market. By making investments over time and therefore acquiring the underlying investment at different values, the overall impact of volatility in the market is reduced.

Making a one time, lump sum investment also carries a considerable amount of risk. Emotional buying and Fear of Missing Out (FOMO) buying can lead to buying when the market is high and making a poor investment decision. Dollar Cost Averaging avoids making the mistake of buying at the wrong time with regards to the investment cost. Further, by having purchase decisions automated, knee-jerk, emotional decisions are removed from the equation.

Dollar Cost Averaging is a core investment strategy that is useful for acquiring almost any investment for which the value of the investment is not stable. It is most commonly used for investing in pooled investment vehicles like Exchange Traded Funds (ETFs) and mutual funds, but this strategy is particularly useful for investing in the Crypto-space as well. Dollar Cost Averaging reduces the impact of making psychological financial decisions and market timing.

Disclosure: Nothing in this article should be interpreted as financial advice or the recommendation to purchase a financial instrument. Always DYOR (do your own research) before making a financial decision, especially when buying and selling cryptocurrencies.

Also, note that I maintain positions in both ETH and BTC.