Investing is hard. You must be cognizant of market prices, market trends, and whether the market is in a bull or bear cycle. This level of due diligence has scared many away from the prospect of investing. This is even truer in the case of altcoins, as the market is extremely volatile. An altcoin’s price can change directions without warning several times in a day, leaving investors desperate to “sell high” and “buy low.”
There is another investment technique, however, that suggests that you ignore the concept of “sell high, buy low.” Called “dollar-cost averaging,” it encourages spreading out the purchase of an asset such as an altcoin over the course of a period of time to minimize risk.
How Dollar Cost Averaging Works
To understand this, let’s imagine two brothers, Mike and Spike. The brothers both want to invest in PizzaWorks, a blockchain-enabled food delivery service. Mike used the common advice of buying low to wait for a dip in the price. When the price hit $1, Mike bought 5,000 coins.
Spike, on the other hand, opted to use dollar cost averaging. Unlike Mike, he opted to buy $500 worth of coins per month for ten months. Over this period, he had to buy against a price spike of $2.75 per coin, but he also was able to benefit from two price dips of $.55 per coin and $0.32 per coin, respectively.
At the end of the ten months, Mike still has his 5,000 coins. Spike, on the other hand, has 7,500 coins. As he purchased a set dollar amount of coins each month, he did not need to worry about timing pricing spikes. This, of course, denies Spike the possibility of timing his purchases perfectly and scoring big on a rally or crash. As the market is unpredictable, however, Spike was likely able to sleep better than Mike for those ten months.
Dollar-cost averaging plays against the volatility of the market, offering the investor an opportunity to “average out” the purchase cost of an investment. This allows potential long-term investors to mitigate any potential randomness in the market’s buy prices. The investor will no longer need to watch the market as carefully as an “all-at-once” investor must.
Using Dollar Cost Averaging for Bitcoin
Given bitcoin’s sharp growth curve, using dollar-cost averaging is a good way to purchase bitcoin at less than the market price. As you are regularly buying bitcoin over an extended period, you can take advantage of price corrections and temporary pricing dips without having to scramble to liquidate other resources.
It is dangerous to chase highs with bitcoin, as it is extremely volatile. A consistent, steady investment curve is the best way to approach bitcoin's market chaos.
This, however, does not reduce or trivialize your need as an investor to follow due diligence. Dollar cost averaging cannot help you, for example, in a collapsing market. While dollar cost averaging can make investing simpler, it does not make it a mindless activity.
However, for the beginner or the risk-averse investor, being able to ignore the churning of the market may spare you some gray hair in the long run.
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