If there is one thing that panics new investors in cryptocurrency, it is the wild swings in price. Since most people enter the market when it has risen substantially, they are often unprepared for the stomach turning drop in price that usually comes after a large run up. Dollar cost averaging, if followed properly, is a strategy can help take out some of the bite of market volatility, especially for new or nervous investors.
There is a good case for using dollar cost averaging as a cryptocurrency investment strategy going forward, considering the recent decline in prices. This strategy reduces the risk of investing a large amount at the peak of a market – a mishap many bitcoin investors made when the price climbed to almost $20,000. Dollar-cost averaging uses a scheduled method of investing a fixed amount. For example, an investor may buy as little as $1 worth of a particular cryptocurrency on the same day every month, regardless of what is going on in the market. This allows them to buy more when the price declines, but less when the price rises.
This should only be done with a well researched and diversified holding of established coins. There is too high of a failure rate and chance of fraud in new cryptocurrencies and ICOs to consider them as a long term holding – they need to be watched daily. Dollar cost averaging will be easier to do when the ‘blue chip cryptos’ become obvious, and baskets of the best currencies are available for purchase in funds sold by reputable brokers. For now the options are mostly do-it-yourself, or use an exchange such Coinbase that has a recurring purchase option for a very limited number of cryptocurrencies.
The discipline required to carry out dollar cost averaging in the volatile cryptocurrency market will be challenging to say the least. If you lack the discipline for such a strategy, you may panic and stop buying when the price drops and resume only when the price has risen, defeating the whole purpose of dollar cost averaging. This holding strategy doesn’t mean you shouldn’t sell if the price drops because of a substantial negative development to the coin that it is unlikely to recover from.
If you are planning on investing in cryptocurrency or ICOs, start small and only with money you can afford to lose. Before you buy:
- Educate yourself on cryptocurrency and ICOs.
- Do proper research – look for the bad news or red flags.
- Make plans to diversify so you don’t have “all your eggs in one basket”.
Risk Reduction Strategies in Cryptocurrency: Part 2 – Research
Risk Reduction Strategies in Cryptocurrency: Part 3 – Diversification
Risk Reduction Strategies in Cryptocurrency: Part 4 – Dollar Cost Averaging
Risk Reduction Strategies in Cryptocurrency: Part 5 – Security Precautions
- For beginners that are having trouble understanding what cryptocurrency is – If Cryptocurrency Confuses You… Start Here
- Learn how to reduce some of the risks of investing in cryptocurrency – Cryptocurrency & ICO Screening Guide for Investors
- Learn more about investment risk – Investment Allocation by Risk Level