Crypto Holders: Is It Time to Dollar Cost Averaging? – Bitcoin (BTC/USD), Ethereum (ETH/USD)

This educational guide exploring how to protect crypto assets in a bear market was created in collaboration with Caleb & Brown. Caleb & Brown is the world’s leading cryptocurrency brokerage. Learn more here.

With so much diversity in the ways successful investors have made their fortunes on Wall Street, it’s hard to agree on what constitutes good stock market investment advice.

What appears to be excellent advice to a value investor, for example, may be considered a death sentence to a growth investor. Similarly, some practices that day traders consider sacred could never be replicated by swing traders.

Despite the countless differing opinions, there is perhaps one idea that most successful investors will agree on: To be a successful investor, you often have to exhibit behavior that goes against human nature.

For value investors, this may mean holding on to losing positions while they wait for economic conditions to improve. For growth investors, this can mean cutting losses immediately when a stop is triggered. For traders, it can mean buying as the stock has reached a new high rather than waiting for “bargain” prices (William O’Neil is famous for advocating this behavior in his book “How To Make Money in Stocks” ).

All these activities are difficult because they go against human instincts. It’s not instinctive to accept being wrong with grace, to patiently wait for opportunities to arise while you watch others play, or to buy a product you could have gotten cheaper at another time, but successful traders exhibit this behavior all the time.

In the world of value investing, such behavior is dollar-cost averaging, and one of its biggest proponents is billionaire business magnate Warren Buffett. In the midst of this year’s bear market, Berkshire Hathaway Inc. BRK raised $3.8 billion worth of securities for the three months ended June 30.

What is the average dollar cost?

Dollar cost averaging (DCA) is the practice of systematically investing equal amounts of money at regular intervals, regardless of the price of the asset.

This method is championed by value investors, such as Warren Buffett, who choose to invest in companies that meet certain fundamental criteria and bet on them for the long term. DCA can reduce the overall impact of price volatility by reducing the investor’s average cost per share and avoiding the risky and stressful game of bottom hunting.

Consider the following example:

X buys 100 shares of XYZ Company at $10. When XYZ Company falls to $9, X buys another 100 shares. For $8, X buys another 100 shares. At this time, X has 300 shares of XYZ Company at an average price of $9 (8+9+10)/3). If the stock rises to $9, X will breakeven on the trade, while an investor who only bought 100 shares at $10 will be down $100.

Continuing the above example – if X continues to buy shares while XYZ Company fluctuates between $8 and $10, and then XYZ Company rises to $15, the investor will suddenly have a significantly larger profit than the investor who made a one-time purchase at $10. Thus, DCA also allows investors to culminate significant positions at reasonable prices.

The two most important factors to DCA are the belief that the asset the investor is dollar cost averaging and the time horizon they have set for the DCA process. Many professionals recommend investors to DCA into the safest investment companies such as SPDR S&P 500 ETF SPY or Nasdaq Composite Index IXIC over a longer period of time – usually five to 10 years.

A finding from Official Data shows that a dollar cost average of $100 into the S&P 500 from 1900 to 2022 would yield about $7.6 million. Due to its ease and simplicity, DCA has been hailed by many as a standard mode of wealth generation.

Warren Buffett famously says, “If you enjoy spending six to eight hours a week working on investments, do it. If you don’t, dollar cost average index funds.”

Considerations in a bear market

With 2022’s bearish stamp on the stock and cryptocurrency markets, investors may be wondering if it’s an opportune time to start their own DCA flows.

It should be noted that while DCA can reduce volatility and help investors build for the future, each person’s risk tolerance is different. The best practice for those who do not call finance a profession is to consult a professional about whether this is the best course of action for you.

Fortunately, more traditional stockbrokers and banks like it Toronto-Dominion Bank TD and Interactive Brokers Group Inc. IBKR provide DCA options. As the world’s leading cryptocurrency brokerage, Caleb & Brown also offers investors insight into the DCA process with a specific and expert focus on the cryptocurrency space.

If you plan to invest in Bitcoin BTC/USD, Ethereum ETH/USD or any other cryptocurrency in the 2022 market and you are considering DCA as a potential strategy, head over to Caleb & Brown and connect with your very own personal broker. Click here to get started.

Interested in learning more about things to keep in mind in a bear market? Check out the previous article in this series here.

Featured image by Vitaly Taranov on Unsplash

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