An investing strategy is something that we’ve all heard of, but not many implement in their crypto investments. It is important to know that you don’t have to be a professional financial advisor or trader to create such a plan for yourself. In fact, on the basic level, it’s pretty simple!
In this article, I would like to discuss the importance of preparing an investing strategy, as well as compare the DCA in/DCA out and timing the market approaches.
Why create an investing strategy?
As you may already know from other aspects of your life, having a set plan for something, especially one that’s written down, makes it much easier to not overthink your approach and actually follow through with what you planned. Something similar can be applied to investing. When you have a specific plan of when to buy, how much to buy and, even more important, when to sell and how much to sell, everything becomes much easier.
The current economic climate is definitely disturbing. Covid, war in Ukraine, many countries experiencing record inflation, stock and crypto markets plummeting, all these aspects contribute to making 2022 a year full of uncertainty and anxiety. Because of that it might be even more important to prepare a thought out plan and dedicate time and effort to sticking to it.
What is a investing strategy?
In short, an investing strategy is a plan that sets the goals and expectations for a specific investment. There may be many variations of strategies depending on personal preferences and circumstances, but what they have in common is that they are supposed to facilitate achieving your goals.
Your investing strategy is going to depend on various factors, such as your starting capital, how long you are planning to be investing, your risk tolerance and what goal you are trying to achieve.
There is also a difference in approach. Some may prefer to be more aggressive and invest in projects that give a smaller chance of success, but when everything goes right, can yield massive returns. Others might prefer investing in more established projects such as Bitcoin or Ethereum and try to minimize the risk. Usually, the riskier the approach, the higher the returns might be. However, you should never risk more than you’re willing to lose.
It is also extremely important to base all your decisions on data analysis, research and trends and not on emotions. FOMO (fear of missing out) and FUD (fear, uncertainty, doubt) can be extremely tempting to follow, but what I’m trying to convey in this articles is that when you have a plan and stick to it, it really is easier to achieve your goals.
Dollar cost averaging (DCA), the most popular crypto investing strategy
The old saying goes „time in the market beats timing the market” for a reason. It is extremely difficult to time the bottom value of a cryptocurrency or a stock in the timeframe that you’ve set for yourself to buy it in and equally as difficult to time the top in order to sell for maximum profit.
That is why the easiest way to work around that is what we call the DCA strategy. Dollar cost averaging is an investment strategy in which the investor divides the total amount they want to spend buying something into smaller purchases spread over some ammount of time. For example, lets say you have a 1000$ to invest right now. You could buy in one big move risking that the price will fall lower and you’ve missed the bottom or got caught in a dead cat bounce or you could spread that 1000$ into smaller purchases of, for example, 100$ once a week or once a month. That way, in theory, you should minimize the risks of mistiming your investment and come out with a strong starting position. It is important to note that when following a DCA plan, you must buy in regular intervals regardless of the price. If you’re waiting for a better prices, you are timing the market and not DCAing!
There ar emany online calculators that can help you visualize how that strategy could work for you over the years and I would definitely recommend giving one of them a try.
Lastly, I would like to discuss why DCA in a bear market/crypto winter/however you would like to call the current situation is even more important. Lets imagine for a second that you bought Bitcoin at 50000$ per BTC on December 7th. That would obviously mean that your position is not the strongest right now, but it can be improved before the next bull run comes. If you decided to DCA a 100$ per month (buying on 7th of each month since December), you could have lowered that average cost per Bitcoin to 49823,05.
It may not seem like a huge difference, but keep in mind that the more you are able to improve your position, the better multiplier you are going to have for your returns.
If you decided to DCA 1000$ per month, the results get exponentially better decreasing the average cost all the way to 48445,32.
DCA in and DCA out!
Since we already discussed the strategy of dollar cost averaging when buying, lets briefly talk about DCAin out when selling. We already know that timing the market is a very difficult thing, so in order to decrease the risk of selling at a wrong moment, you can instead spread your sells into smaller portions spread over time (sounds familiar?). When your investment reaches the goal value or is close to it, you can start selling some percentage of your holding each day/week/month to spread that risk over time. In theory, that should allow you to get the best results out of your investment.
I hope that these examples showed you why having an investment strategy such as DCA (or whichever one you create/use yourself) can simplify a lot of things and give you a feeling of certainty in your financial adventures. We are in an extremely volatile market and need some sort of help to make it through.
In the long run DCA should theoreticaly protect you from tempations and risk and lead to better results than trying to time the market.
Please feel free to comment and discuss your investment strategies and thoughts about DCAing.
