Crypto-cost averaging is a new way to think about a tried-and-true traditional investing strategy known as dollar-cost averaging.
Dollar-cost averaging is a method for slowly accumulating a position in the market. The goal is to make regular investments of the same dollar amount at repeated intervals.
Investors who use a dollar-cost averaging strategy leverage discipline and long-term planning to hedge against major market movements up or down. Some of the buys might happen while the market is surging, and others occur while the market is declining.
In the end, it doesn’t matter because the investor trusts that over time the market will continue to grow, moving up and to the right, converting all of those seemingly little buys into a valuable market position.
Before we go any deeper into this topic, please be advised that this post is intended for informational purposes and not intended as investing or financial advice.
Benefits of crypto-cost averaging
A lot of the same lessons and logic about traditional dollar-cost averaging into traditional markets can be carried over to crypto markets. Maybe, given the crypto context, it makes even more sense.
When compared to crypto markets, traditional markets are relatively stable, tranquil almost. Cryptocurrency markets by their nature are extremely volatile. They move dramatically, leaping to great heights one week, only to retreat by comparable amounts days later.
So timing the cryptocurrency markets is difficult. But, when looked at in the scale of years and not days or weeks, segments of the crypto market have grown exponentially.
Crypto-cost averaging takes a little of the edge off speculative investing that cryptocurrencies are known for because taking regular positions over time equates to investors buying both market peaks and market valleys.
Instead of ping-ponging between FUD (fear, uncertainty, and doubt) and FOMO (fear of missing out), the two main forces that seem to drive the swings between bull and bear crypto markets, crypto-cost averaging allows users to non-emotionally gain exposure to volatile crypto markets.
Costs of crypto-cost averaging
Obviously, the crypto-cost averaging strategy is not conducive to day-trading or for speculating with big trades. But that’s sort of the point. Instead of looking at the crypto markets as a boom-bust scenario, crypto-cost averaging investors are slow and methodical.
But, on that note, it takes time to build a long-term position, especially if the investor is only adding small amounts at regular intervals. The slowness might be frustrating for some. There might also be times where investors feel like the missed out, especially in crypto, where upward market movements can happen quickly. (Interested in using the Abra app to hedge against crypto market volatility? Check out this post on moving from crypto to fiat to lock in gains.)
An additional cost of crypto-cost averaging is that it can lead to investor complacency. The problem with setting up a regular investing schedule is that it might be easy to stop paying attention to market fundamentals.
If a crypto project is tanking because of something fundamental and doesn’t seem like it will recover, then it’s pointless to continue to invest.
So, while crypto-cost averaging can lower the emotional roller coaster of investments moving up or down, it’s not advisable for investors averaging into a market to be totally checked out of their portfolio’s performance and to occasionally readjust and rebalance based on new information.
Average in, average out
When people talk about dollar-cost averaging or crypto-cost averaging, they are usually talking about the slow and steady method of accumulating a position in a market.
But the strategy also works for moving accumulated assets out of a market.
Moving slowly out of a market is done for the same reasons as moving slowly into a market. Incremental, but regular moves will help hedge against any crazy changes in market value.
And just like averaging-in, averaging-out might mean that an investor takes some money out when the market is hot, and some out when it is cooling, but the general idea is to benefit from the average of all of the market movements.
While investing in cryptocurrencies is a relatively new opportunity, there are a lot of lessons to be learned from the strategies people have used over the decades for successful investing in traditional markets.
Crypto-cost averaging, which is similar in principle to dollar-cost averaging is one example because the methodical and regular strategy of slowly gaining market exposure over the long-term helps insulate investors from crazy market fluctuations.
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