If you’re looking to add to your cryptocurrency portfolio or enter the market for the first time, this article is for you. Even if you’re already invested in a market, cost averaging any big purchases, especially in the volatile space of cryptocurrencies, is a must.
Cost averaging can be summarized as splitting up the amount you want to invest into “x” number of portions and then submitting “x” number of buy orders evenly over a certain interval of time. This will make a lot more sense with the following example.
Let’s say you want to invest $1000 into Bitcoin. Rather than investing that $1000 all at once, you decide you want to cost average your investment over four purchases – one today, and then one every week for three weeks (I will mention the benefit of this later). To do this, each purchase would be $250 so that your total investment still adds up to $1000. Thereby giving you the same $1000 investment, but instead of paying the price of Bitcoin all on the first day, you end up paying the average price of Bitcoin over the four purchases that were made over three weeks (week 0, week 1, week 2, week 3).
Note: In the example, we used four investments and a one-week duration between purchases. There is an infinite number of options for cost averaging. Generally speaking, increasing the number of investments or frequency would decrease risk and limit upside. The reverse is also true.
Why would you want to cost average?
The strategy is normally used by investors with a lower risk tolerance. However, in the cryptocurrency space, it can be used as a way to decrease your personal risk in a market that is replete with big swings in price. How does this work?
Let’s go back to the previous example and show what happens if the market goes down during the price averaging period.
Now, what happens if the market goes up during the price averaging period.
Summary
By cost averaging your purchase, you are decreasing your volatility. You will lose less money if there’s downswing at the expense of profiting less if there’s an upswing. In a market full of turbulent cryptocurrencies, I’ll take the downside protection at the expense of a little potential profit. It’s a mental win-win. If there is a downswing you will be pleased that you lost less. And if there is an upswing, your friends will call you greedy if you’re upset with the profit.
How can you begin investing?
You can buy Bitcoin, Ethereum, Litecoin, and Bitcoin Cash on Coinbase. Then to buy altcoins, you will need to transfer Bitcoin to an account at Binance in order to exchange it for any altcoins. If you get stuck or need help, send us a message through our Facebook page or contact page and someone on staff will walk you through the process.
