Hello everyone! We are back again today with another edition of Splinterland Economics - a series in which we introduce a basic economic concept and then apply it to Splinterlands. If this is your first time reading, just to tell you a little bit about myself: my day job is in an unrelated area but I consider myself a little bit of economics nerd - I read a little (or maybe way, way) more news than I should, double majored in econ, and am obsessed with optimization. I love the way Splinterlands is equal parts card game and resource allocation game. My goal with these articles is to share a little bit of what I know with you all.
Our subject today is a little closer to the finance side of things than many of our previous topics, but is a very important idea when it comes to buying or investing. While we are considering buying and investing in something, two of the most important decisions we can make are what to buy, and when to buy it. And while many previous posts in this series have gone into good ways to decide what to buy, this entry deals with when to buy it. Today, we will be talking about dollar cost averaging!
What is dollar cost averaging?
For anyone looking to invest or otherwise purchase a good or item, the best time to buy is when the price is the lowest. Unfortunately, when it comes to markets and prices, for most of us there is no way to say for sure what till happen to the prices of a particular item in the future. Dollar Cost Averaging is one way to address this uncertainty. The concept of dollar cost averaging it to divide your purchase amount up over time, and to buy a set amount (in dollars, for example) of that good at various points in time.
As an example, let's say that I wanted to purchase $10,000 of stock in Costco. Or if you aren't a fan of Costco, imagine your favorite company or cryptocurrency. Instead of buying it all at once, dollar cost averaging would spread out the purchases. So you may instead choose to buy $2,000 of stock per month for 5 months. In our hypothetical example, your series of purchases might look something like this:
You may be thinking that by doing this then you are nearly guaranteed to miss buying at the exact optimal time, and you are correct. However, the cool part about dollar cost averaging is that by purchasing set amounts of value over time, you will usually end up paying a lower average cost per unit than the average cost of the item you are buying over that time period. In our hypothetical example here the average monthly cost is $518.40 per share, but with our DCA strategy we are able to obtain our shares at an average cost of $514.28. And while doing so, we are reducing the chances of paying a "high" price. In our example here, if we made all of our purchase at the worst time we would have paid $566, or more than $50 more per share!
Depending on your appetite for risk and degree of information you have about the market, you may want to buy everything in a single large transaction. However, for anyone who is buying with a long time horizon (i.e., not day trading), then trying to "time the market" and buy at the absolute best time is a risky plan. Yes, you may get lucky and buy the low. But you could also spend all of your liquidity and then see the price go even lower. Dollar cost averaging is one possible strategy that can reduce your risk from price fluctuations over time.
How do we apply it to Splinterlands?
Splinterlands has a multitude of items which are acquired in large numbers and therefore may be candidates for dollar cost averaging. The most obvious areas are the various cryptocurrencies in the ecosystem. If you are planning on making purchases of packs or potions from the Splinterlands game shop or think you will want to buy cards on the various card marketplaces, then you will likely want to acquire Dark Energy Crystals and/or vouchers. Similarly, if you have a goal of obtaining a larger governance vote or want to stockpile in advance of future gameplay functionalities or airdrops, you may want to buy large amounts of SPS. DEC, vouchers, and SPS are all exchanged on Hive marketplaces and have prices that fluctuate over time. If know ahead of time that you will need these items then you can split up your total desired purchase over time via dollar cost averaging.
Another item you may consider dollar cost averaging in Splinterlands is cards. Leveling up cards in Splinterlands requires combining large amounts of them, in some cases using up to 400 cards to obtain a single maximum level card. While every card is unique, you can still spread your purchases out over time and accumulate a set value amount of a card until you have however many you desire. Doing so can help to smooth out fluctuations in card prices and help you to avoid paying exorbitant prices caused by sudden spikes in pricing.
Why should we care?
Dollar cost averaging is a powerful tool to have in your investment portfolio. For the vast majority of us that are unable to determine the optimal time to buy items in advance, dollar cost averaging hedges the risk of buying at a bad time and will generally get you a "good enough" price. Another advantage? Planning out your purchasing plans in advance makes it easier to stick with your investments by automating your buying to a degree, and making it more likely that you will stay to your plan. Dollar cost averaging is not for everyone and is not necessarily the best plan in every situation, but it is an important strategy to keep in mind as an option in our investing toolkits.
Thank you so much for reading all the way to the end. Interested in seeing some more of my writing in the future? Be sure to give me a follow! In the meantime, if you'd like to see some of my recent posts:
Better, Faster, Stronger - Using Magi of Chaos in Battle! - Last week's battle challenge, featuring Magi of Chaos!
Splinterlands Economics: Utility - An overview of the concept of utility, and how we can apply it to Splinterlands.
Splinterlands Economics: Prisoner's Dilemma - An introduction to the Prisoner's Dilemma, and how we can apply it to Splinterlands.
Thinking about giving Splinterlands a try but haven't signed up yet? Feel free to use my referral link: https://splinterlands.com?ref=bteim, and be sure to reach out to me if you have any questions!
All images used in this article are open source and obtained from Pixabay or Unsplash. Thumbnails borrowed with permission from the Splinterlands team or made in Canva.