Dollar Cost Averaging, Timing the Market and other purchase strategies

By Senzacervello | Crypto Vagabond | 1 Sep 2020

One of the biggest headaches when it comes to crypto, but this apply to all markets where assets are highly volatile, is to decide effectively when, what and how much to buy.

In this post I will not talk about the “what” as this is a choice that does not depend only on financial aspects.

Whoever is not a regular trader has to deal with the problem of when and how much to buy because wrong entry points can significantly harm your efforts to build a profitable portfolio.

Dollar Cost Averaging

Replace freely the word “dollar” with your main fiat currency to have your own “cost averaging” system. This technique is very often used to try to reduce the volatility of the target asset you want to buy. In short, you set a periodic budget in fiat and you buy at regular intervals the equivalent in assets regardless of their value at the time of purchase. Even shorter, you buy 10 dollars a week worth of $ETH.

Generally speaking, this technique should work smoothly as you spend a fix amount in fiat and you get a variable amount in crypto-currency: sometimes you get more, sometimes less. Anyway, it has its cons and they are not negligible. For example, if your “purchase day” falls constantly on the rebound phase of the cycle, you will end up purchasing every time at the least convenient price. The second con is the amount you have available for the purchase. If that amount is too little, you will risk wasting a lot of your fiat balance in fees and additional costs as very often fees and costs have a minimum flat amount. If this is the case, I would strongly recommend decreasing the number of purchases (extend the interval) to raise their amount per purchase.

Timing the market

Is obvious that timing the market could prove to be more effective than Dollar Cost Averaging, but it requires a lot more effort and higher knowledge of financial markets. It could be used also by newcomers with some caveats.

The first is to keep in mind that also professional traders very often miss the highest price when they sell and the lowest when the buy. Nevertheless, especially when dips and rebounds have huge waves, there is space enough in the middle to close good deals.

The second is not to panic when your assets are losing value and not to FOMO (Fear Of Missing Out) when they gain. Trading should be the least emotional possible. If your aim is to build your personal wealth in the long run, the short-term fluctuations should not touch you too much.

The third is to always keep a reserve. Having aside some extra money can help if and when you will have to cut the price or to take an unexpected opportunity

A possible alternative: Currency Cost Average

I did not read about this possibility very often, but instead of averaging your fiat cost balance, you could go to average your target currency average amount. In other terms, you could purchase the same amount of currency at regular intervals or to make a purchase every time you have enough fiat balance to get the amount of currency you want.

It is the opposite of Dollar Cost Averaging and can be of help especially when the market is in its bear cycle. During bullish runs could be not applicable because huge currency gains in a truly short time can make your fiat balance never sufficient. But it could be combined with Dollar Cost Averaging so that you can average your currency cost when the market is bearish and average your fiat cost when the market is bullish

Whatever the strategy you will decide to adopt, I would suggest to focus on assets you can earn interests on. Sometimes money is so kind that generates itself without you having to do anything (or little).

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Crypto enthusiast. One day fiat will be only for collectors

Crypto Vagabond
Crypto Vagabond

My life in cryptospace among blockchain games, NFT, promising projects and whatever catches my attention. In this blog I only write my own opinions and they are not financial advises for any reason. Always do your own research and never put at stake what you can't afford to lose

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