Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. No one can predict where the market is going at any given time, so why even try? Putting your money in an investment all at once - thinking it will only go up - can be a very risky idea. By following a simple practice known as dollar cost averaging, you can protect yourself against market fluctuations and downside risk in the market. By buying a fixed dollar amount on a regular schedule, your focus is on accumulating assets on a regular basis, instead of trying to time the market.
Plan to be spontaneous tomorrow.
With dollar cost averaging, you take a lot of the emotion and fear out of investing because where the market goes in the short-term is far less important to you, as long as you stick to a regular investment plan. If cryptocurrency enters a bear market and your investment falls in value, you’d just end up buying more tokens at a lower price.
For example, let’s say at the beginning of this year, you put $100,000 all at once into a crytocurrency priced at $100 a coin. By the end of the year, a recession or a dip in the market hits and the coin declines to $70, a 30% loss of $30,000. Instead, what if you evenly distributed your money over the course of the year? Let’s say you decide to invest $25,000 each quarter. When the coin is down, you end up purchasing more coins, and when it’s up, you purchase less coins. This increases the number of coins you purchase and also decreases your average coin price.Instead of holding 1,000 coins valued at $70,000, and losing 30% or $30,000 on your initial investment, you’d hold 1,197 coins valued at $83,790, losing 16% or $16,210 on your initial investment.
Let’s take another example. Here, your chosen coin starts the year at $100 per coin, and then finishes at $90. If you bought at the start of the year, you’d have lost 10% or $10,000. You could have made money dollar cost averaging, even if the coin ends the year down in price. At the end of the year, you would have made $4,580, compared to a $10,000 loss under the other scenario.
The bottom line is that with dollar cost averaging, you can reduce market risk and build your investments over time, regardless of where the market is going.
There are a few things investors should understand before starting their own dollar cost averaging plan:
Dollar cost averaging is a strategy that is better suited for investors with a lower risk tolerance and a long-term investment horizon. This strategy makes the most sense when used over a long time period with volatile investments.
Next, the strategy is no guarantee of good returns on your investment. Dollar cost averaging into an investment that continues to fall each and every month is not a wise move.
Finally, investing involves risk and your own due diligence, so you should only dollar cost average into an investment that you understand and are comfortable with. You shouldn’t just set up an automatic investment plan and forget about the investment, either – it is probably a good idea to regularly check in on it.
The DCA approach described here is well suited to traditional stocks, ETFs or mutual funds. However, the special characteristics of the cryptocurrency market mean that some tweaks or refinements to this approach can be beneficial.
Even in a bear market there will be certain types of cryptocurrency that are, in general, outperforming the rest. What we mean by market sector in this context is the category of “use case” for tokens that currently seem to be popular and are driving market trends. Some examples of “use case” are given below:
- Store of value (e.g. Bitcoin or Decred))
- Privacy (e.g. Monero or Zcash)
- Smart contract platform (e.g. Ethereum or Hyperledger Fabric)
- Blockchain interoperability and scaling solutions (e.g. xDai (STAKE) or Polkadot)
- Smart contract facilitator for enterprise (e.g. Chainlink or Unibright)
- Data and Artificial Intelligence (e.g. Ocean Protocol)
- Decentralised finance “DeFi” enabler (e.g. Maker or Compound)
- Digital cash (e.g. Dash or Litecoin)
- Energy market (e.g. Energy Web Token or Power Ledger)
- Indexed basket of cryptocurrencies (e.g. SCIFI.Finance or Index Cooperative)
- Identity management (e.g. KILT or Sovrin)
- Social media (e.g. Theta or Howdoo)
- Gaming (e.g. Enjin or Decentraland)
- Supply chain and logistics (e.g. Morpheus Network or VeChain)
- Securities trading (e.g. Polymath or INX)
- Non Fungible Tokens (NFTs) (e.g. Lukso or Ethernity Chain)
- Insurance (e.g. Etherisc)
- Synthetic assets (e.g. Synthetix)
When you successfully ride a wave and seem to be making a profit don't forget to realise that profit by selling at least some of the coin before it slides back down into the next trough.
Watch out for the Hype
Marvin constantly watches what is going on in the crytocurrency markets and carries out research into the most promising projects. To save you duplicating that effort we will once per month update our TOTEM. This information is simple and free. But when you discover that it consistently proves to be of value please consider sending a donation.
Hard work pays off in the future. Laziness pays off now.
If you fear that due to limited aptitude for math you may never understand how cryptography actually works it can be soothing to remember that "ELEVEN PLUS TWO" is an anagram of "TWELVE PLUS ONE"
Instead of making quarterly investments, as described in the strategy above, make it a smaller monthly investment.
Depending upon market trends and new project opportunities consider investing in a different coin each month. Blockchain technology is developing at an extraordinary pace. Never become emotionally attached to a particular project or coin. The project that was the most innovative and exciting 3 months ago and has recently given you a great return on your investment may now be past its time for maximum growth.
If your chosen coin performed well in the past month it is quite probable that a different coin will perform better in the next month. So don’t always buy the same coin again if the price now appears to be close to its all time high.
If your chosen coin performed poorly in the past month, don’t sell it at a reduced price but consider buying another cryptocurrency this month that may have more potential to significantly increase in value while you wait for the price of your last pick to recover.
Irrespective of whether your last month’s choice appears to have been good or bad take account of the overall market and the hype and trends in cryptocurrency to decide the best market sector from which to select a coin for the next month.
Marvin says, "You think you've got problems? What are you supposed to do if you are a manically depressed robot? No, don't try to answer that. I'm fifty thousand times more intelligent than you and even I don't know the answer. It gives me a headache just trying to think down to your level."
Try to ignore the image of Dionah Carlinton Housney appearing in "The Heart of Gold" and work out a strategy that suits your personal financial situation. Then try to stick to it.
Simply investing for growth in a cryptocurrency's value isn't your only option. Some tokens in proof-of-stake (POS) blockchains incentivise you to contribute to the network's security by offering you passive income from the interest you can receive if you stake the tokens.
Some decentralised finance (DeFi) products reward you for locking away your coins for a period to provide liquidity in their trading platforms, but before staking you should beware of long lock-up periods that may compromise your investment agility.
One of the more recent concepts that has emerged is yield farming (also referred to as liquidity mining). It is a way to earn rewards with cryptocurrency holdings using permissionless liquidity protocols. It allows anyone to earn passive income using the decentralized ecosystem of “money legos” built on Ethereum. Yield farmers will use very complicated strategies. They move their cryptos around all the time between different lending marketplaces to maximize their returns. They’ll also be very secretive about the best yield farming strategies. Why? The more people know about a strategy, the less effective it may become. Yield farming is the wild west of Decentralized Finance (DeFi), where farmers compete to get a chance to farm the best crops.
Automated Market Maker (AMM) technology has taken off in spite of one of DeFi's seldom publicised risks: Users who provide liquidity to AMMs can see their staked token lose value compared to simply holding the tokens on their own.
AMMs run the risk of under-performing a basic buy-and-hold strategy. Why "impermanent"? Because as long as the relative prices of tokens in the AMM return to their original state when you entered the AMM, the loss disappears and you earn 100% of the trading fees. However, this is rarely the case. More often than not, impermanent loss becomes permanent, eating into your trade income or leaving you with negative returns. The term "impermanent loss" might be more accurately described as "divergence loss".
We've all heard of market bubbles and many of us know someone who's been caught in one. Although there are plenty of lessons to be learned from past bubbles, market participants still get sucked in each time a new one comes around. A bubble is only one of several market phases, and to avoid being caught off-guard, it is essential to know what these phases are.
An understanding of how markets work and a good grasp of technical analysis may help you recognize market cycles.
Cycles are prevalent in all aspects of life; they range from the very short-term, like the life cycle of a June bug, which lives only a few days, to the life cycle of a planet, which takes billions of years.
No matter what market you are referring to, all go through the same phases and are cyclical. They rise, peak, dip, and then bottom out. When one market cycle is finished, the next one begins.
The problem is that most investors and traders either fail to recognize that markets are cyclical or forget to expect the end of the current market phase. Another significant challenge is that even when you accept the existence of cycles, it is nearly impossible to pick the top or bottom of one. But an understanding of cycles is essential if you want to maximize investment or trading returns. Here are the four major components of a market cycle and how you can recognize them.
In the accumulation phase, the market has bottomed, and early adopters and contrarians see an opportunity to jump in and scoop up discounts.
In the mark-up phase, the market seems to have leveled out, and the early majority are jumping back in, while the smart money is cashing out.
In the distribution phase, sentiment turns mixed to slightly bearish, prices are choppy, sellers prevail, and the end of the rally is near.
In the mark-down phase, laggards try to sell and salvage what they can, while early adopters look for signs of a bottom so they can get back in.This is a content preview space you can use to get your audience interested in what you have to say so they can’t wait to learn and read more. Pull out the most interesting detail that appears on the page and write it here.