Good day Hiveians!
Join me in analyzing the crypto markets!
Time Cost Averaging
I haven't looked up the term and I do not want to coin it since there is a 99% chance that someone before me came up with it. But it just came to me naturally when looking at the charts. The term is derived from the idea of "Dollar Cost Averaging". This describes an investment behavior when a stock or coin/token is bought at various changing $ levels with the goal of averaging out one's position. This is mostly done when one has bought the highs in a falling market and one wants to buy a better position in case the price goes up again in the future. But this can also be done in a bull market when one's entry was not too strong and one sees the price continue to increase.
But this strategy has a flaw which is amplified in the crypto market where coins/tokens are generally much more volatile. To counter this flaw I want to present here the idea of Time Cost Averaging.
The idea is simple enough: buy assets at fixed time intervals to mitigate risk. The focus is therefore put on time rather than the $ value of an asset. Let me demonstrate why this is important with an example from Hive. In this chart you can see Hive's price action over the last years. It's price peaked at around $3.4 in November of 2021. The price then decreased 92% until the end of 2022 when it reached 25 cents. This is a very volatile price action, but not uncommon in the crypto space.
Now if we wanted to use the strategy of DCA, then we could have considered buying into Hive just 56 days later in January of 2022 a good investment, since price dropped by over 78%!
I should add of course that these strategies always also depend on the time frame of an investor. It would indeed have been a great buying entry point, but only if one wanted to sell Hive in a short period of time again. In other words I could have made an 88% gain if I bought in January and sold shortly afterwards.
But the whole idea of risk mitigation is generally based on a longer investment perspective. As such, in TCA we would generally look at monger time frames such as many months to years. This is especially relevant when bear markets have been identified.
If we had only looked at the $ value of Hive and the % decline of the coin, buying in January of 2021 would have indeed looked like a great entry point. But price continued to decline for almost another year and saw a 64% drop from the previous 78% drop, totally a 92% drop from the ATH. My point is that the DCA strategy can signal to us a false state of the market. Relying on the % decline of an asset does in fact not always tell us when it is a good time to buy since there could still be a lot more room to the downside. Also, on the psychological side of things, we can easily get stuck in a bad position when we buy into a coin at a 78% decline and might put in much more than what would overall be smart.
But if we rather use time as a guiding factor we can take a much safer investment route. It's also good to split up one's capital into smaller fractions such as 20% or 25% at the most and invest with these aounts at fixed time intervals. This could look something like this:
Here we see 7 positions split out into a 50 day buying interval over a year. This would have given us a very consistent entry position.
Conclusion
TCA's advantage seems to be in fact mainly a psychological one. It is easy to get emotional when seeing price drops of 70%+ and entering the market with a much larger chunk than would have been good in hindsight. TCA ensures that one does not buy too much into the market even at such performances and leaves enough "dry powder" ($) to be able to still invest in the future when price may very well be much lower still. The obvious caveat here is that it is very hard to play ahead for such a long time period and have funds available and not (!) spend them irrationally. It is also hard to identify bear markets which means we do not always know when to start TCAing. Nevertheless, I plan to use this strategy more consistently in the future for bear and bull markets.
As a general reminder: Please keep in mind that none of this is official investment advice! Crypto trading entails a great deal of risk; never spend money that you can't afford to lose!
⛅🌦🌧🌦🌧🌨☁🌩🌦⛅🌧☁🌤🌥🌪🌧🌨🌩⛅🌦☁🌤🌥🌤⛅🌤⛅🌦⛅
Check out the Love The Clouds Community if you share the love for clouds!
⛅🌦🌧🌦🌧🌨☁🌩🌦⛅🌧☁🌤🌥🌪🌧🌨🌩⛅🌦☁🌤🌥🌤⛅🌤⛅🌦⛅