Crypto Investment Strategies: Dollar Cost Averaging VS Value Averaging
Disclaimer: the following info doesn’t contain investment advice. Remember that crypto trading is risky and requires your own research.
The golden principle of trading is pretty simple: buy low and sell high. However, nobody knows where the prices will be tomorrow so it’s a challenging task to define lows and highs. In crypto, rates are highly volatile so it becomes even more difficult. Today, Superorder team shares two risk mitigation strategies that simplify crypto trading.
You may ask why one should think about tangled strategies instead of simple HODLing. Well, there are two points. Firstly, HODLing is not the best choice if you want to make profits and grow your portfolio. Secondly, these strategies are advanced forms of HODL with higher efficiency. So, let’s go.
Dollar Cost Averaging
This one should be familiar. Dollar cost averaging or DCA provides for equal regular investments over a specific period. Here’s a simple example: you have $12,000 and want to invest this sum in BTC. Without DCA, you put the entire amount at once. With DCA, you break it into 12 packages and buy $1,000 worth of BTC each month. This approach averages the total value lowering risks and optimizing investments.
Let’s quickly compare DCA and a one-time purchase at the example of H1 2018:
- January 31 — BTC price at $10,139.
- February 28 — BTC price at $10,720.
- March 31 — BTC price at $6,954.
- April 30 — BTC price $9,317.
- May 31 — BTC price at $7,563.
- June 30 — BTC price at $6,367.
By investing $1,000 each month, you’d get the average price of 1 BTC: $8,540. That number is lower than the January’s rate so the strategy results in more BTC gain compared to one-time purchase at the beginning. Here, DCA reduces your investment risks by spreading total costs.
Value Averaging
Value averaging or VA works slightly different. It focuses on equal growth of the portfolio instead of equal investments. While DCA adepts want to buy BTC for $1,000 each month, VA-based traders want to make your BTC account worth $1,000 in the first month, $2,000 in the second, $3,000 in the third, and so on. It may sound like the same ideas but they’re pretty different.
Let’s get to the example again. Say, you want to increase the value by $1,000 each month and start with $1,000 worth of BTC. The next month, rates halve so your initial investment worth $500 now. To reach $2,000, you have to invest $1,500 more. The next month, rates go up a bit so your $2,000 equivalent is $2,500 now. Thus, the investment should be $500. Finally, BTC skyrockets and your $3,000 turn into $6,000. It’s higher than this month’s goal of $4,000 so you sell $2,000 worth of BTC.
At the end of the day, the VA comes to three concepts:
- Buy more coins at a low price.
- Buy fewer coins at a high price.
- Sell coins at an extra high price.
Undeniable benefits of VA include its adaptive nature. While DCA doesn’t react to the market at all, VA suggests you when to buy more, when to stay calm, and when to secure profits.
Finding Your Style
Overall, both strategies are viable. The efficiency depends on the crypto markets’ behavior and each trader’s wishes/skills. For HODLers who just want to buy more and more, DCA is a good choice. But VA is more dynamic. It prioritizes profit maximization and reacts to price swings better. Of course, both options are better than a simple lump-sum investment.
Let’s look at the example from the first section to compare the results of strategies:
- January 31: DCA — 0.098 BTC owned in total; VA — 0.098 BTC owned in total.
- February 28: DCA — 0.191 BTC owned in total; VA — 0.187 BTC owned in total.
- March 31: DCA — 0.334 BTC owned in total; VA — 0.431 BTC owned in total.
- April 30: DCA — 0.441 BTC owned in total; VA — 0.429 BTC owned in total.
- May 31: DCA — 0.573 BTC owned in total; VA — 0.661 BTC owned in total.
- June 30: DCA — 0.730 BTC owned in total; VA — 0.942 BTC owned in total.
Note: in April, VA strategy suggests to sell a bit.
Thus, a DCA investor would end up with 0.730 BTC and zero fiat profits while a VA trader would have 0.942 BTC and a small gain in dollars.
The Winner
Remember that bots dollar cost averaging and value averaging have pros and cons. For example, DCA is more limited in taking profits. But it can result in a higher value of your portfolio in the very long run.
Instead, VA helps to define entry/close points and generates higher ongoing gains during the bull market. Still, it may be unacceptable for some investors as it requires to invest really huge sums at bear trends.
Clap & share this article if it was helpful. And don’t forget to optimize your trading with the proper software. Just like Superorder, yeah!
