Can dollar-cost averaging really make crypto investments easier?

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TL;DR:

Clinton Mbah, a Co-founder of auto-investment app, Accrue, says dollar-cost averaging is the “gentlest introduction to investing”. Dollar-cost averaging, he explains, is an investment strategy that experts and beginners alike use when they’re purchasing mostly volatile assets like stocks and cryptocurrencies. It is a strategy where you invest the same amount at a fixed interval, for a specified period of time, regardless of the market. Clinton says he recommends it to beginners because it can act as a learning and relative safety tool.

I recently learned about a new investment strategy called dollar-cost averaging. This strategy allows me to invest a fixed amount of dollars into a financial or crypto-asset repeatedly and at a fixed interval. So instead of trying to predict the market and buying at either the top or bottom, I can invest regularly and let the market do its thing.

Okay, maybe I should start from the beginning.

With financial and crypto markets just spinning these days, my mental health isn’t giving what it should be giving at all. I looked at the current price of Bitcoin the other day and gasped audibly. Let’s not even get into my portfolio — crypto and others.

My sister said she thought my gasp was a reaction to something terrible that had happened, and she was right. I was not having a good time. I have said in the past that I hate it when things like this happen to my hard-earned money, so I needed something to calm me immediately.

After drinking a glass of wine on my employer’s time, I did some research and asked around. One term that kept popping up was “Dollar-cost averaging” (DCA). I needed to know what this term meant immediately and how DCA could help me ease investment losses.

For help, I hopped on a call with Clinton Mbah, one of the co-founders of Accrue, a wealth-management technology company that provides its users with an easy and convenient way to invest using DCA.

Clinton describes DCA as “the gentlest introduction to investing”. “[DCA] is an investment strategy that experts and beginners alike use when they’re purchasing mostly volatile assets like stocks and cryptocurrencies [but you can use it for any asset]”, he says.

How DCA works, he explains, is that you “[repeatedly] buy the same dollar amounts over a fixed interval”. So, for instance, you can choose to buy $5 worth of stocks or crypto every two weeks, quarterly, monthly, etc., for two years.

Clinton says he recommends DCA to beginner investors because it provides an avenue to learn how the market works without the potentially dire impact of price volatility. He also points out that many experienced investors who use DCA (himself included) do so because the strategy spreads risk and removes the emotion sometimes felt when using other investment strategies.

“A lot of people, even expert investors, use [DCA]. This is because it can be incredibly difficult to time the market and continually gain a profit”.

Clinton says that DCA is the strategy for people who want to prioritise “peace of mind”. It helps minimise risk and alleviates the time and attention required with swing trading (trades that bank on anticipated market price movements) and lumpsum investing (where you invest all your money and try to time the market for the best time to withdraw, or HODL).

He explains that with strategies like lumpsum investing, there is a lot of emotional pressure, especially where you have a fixed exit date. However, with DCA, the market’s movement only affects how many units you buy. During a dip, you’re buying more units. In a rise, you’re buying less, and at the end of your DCA period, you’ve likely averaged out your risk.

However, while DCA is easy in theory, Clinton admits that it is not without its setbacks. One of which is consistency. For DCA to work, you have to be willing to commit (and remember) to invest in your chosen consistency, which isn’t very easy (the multiple knitting videos saved on YouTube is enough evidence that I am standing on this table). But that’s where tech like Accrue comes in handy.

Accrue’s app auto-invests on your behalf; all you have to do is fund your Accrue wallet and select the assets you like. Every time a round ends, you’ll receive a notification and can choose to start another cycle or withdraw your funds. Clinton also notes that Binance has a direct debit feature that could double as a dollar-cost averaging strategy — for instance, if you plan to set up a monthly DCA investment, you could create a monthly direct debit to your Binance, which could serve as a reminder.

Clinton says that another limitation of DCA is that it’s best for a long-term mindset. “If you’re doing really short investments, let’s say a couple of weeks or a month, I don’t think you get to really enjoy the benefits”.

Clinton reiterated that the goal with DCA is to create a profit cushion and offset some of the risks by averaging your position in the market. However, he noted that with DCA, you won’t be making the same amount of profit you could potentially make with the more risky investment strategies. “[With DCA], you wouldn’t make the kind of outsized returns a person who is an expert at swing trading might”. He explains that he wouldn’t advise anyone who doesn’t have years of experience to try swing trading — and even the experts don’t always get it right. Although DCA is not the most profitable, Clinton says, “you get a higher chance at [making a] profit”.

After speaking with Clinton, I am now convinced that Dollar-cost averaging is for people like me — the people with low-risk tolerance who still want some of the benefits of volatile investments. I might not get as much profit as the riskier investor, but I can definitely live with those odds.

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