Finding the perfect entry price for an investment to guarantee the best return has always been the equivalent of the speculators’ quest for the Holy Grail. Many profitable investment opportunities were missed in order to buy “cheaper”. Many potential profits often disappeared for speculators who wanted to sell “at higher prices”. Should solutions such as dollar cost averaging be considered?
Trading, a different job than investing
If day-trading may seem attractive, promising the possibility of earning fortunes by staying in front of your computer all day, the reality is quite different. According to Forbes, 90% of day-traders end their year in the red.
Most of the remaining 10% have made trading their profession with a constant watch on markets and stock fundamentals. It is a complex, stressful and risky job that requires real skills and the ability to remain calm at all times.
Contrary to what “training” sellers, youtubers and other “influencers” often want to make you believe, trading can very hardly be an additional activity to another occupation.
There are only two ways to make money: the first is through work, the second is by taking risks. Trading is both a lot of work and a lot of risk
Bitcoin, a highly volatile asset
Coinhouse is not a marketplace for traders but a partner for investors wishing to gain exposure to digital assets, first and foremost Bitcoin, with a view to medium and long-term investment.
Bitcoin is by nature an extremely volatile asset, which has caused the fortune or ruin of many day-traders. It outperformed all other asset classes over the decade. But it is also an asset that can show drops in its value by more than 10% in a single day.
However, there are alternatives to trading that allow for capital gains, the best known being known in the ecosystem as ”HODL”, which is simply holding cryptoassets over a long period of time and hoping to see the price increase. And it is far from being an absurd proposal.
Statistically, any investor who has bought Bitcoin and waited at least two years has seen the value of his portfolio increase, often by a significant amount
Like many other assets, Bitcoin is a cyclical market with bull and bear periods. In the ten years of its existence, at least six of these cycles have been observed, which remain by nature unpredictable in both their amplitude and duration.
A long-term investor will avoid most of the problems faced by traders, but one remains: what is the best way to get into the market?
The best weapon against volatility: dollar cost averaging
Dollar cost averaging consists in smoothing out your investment over time, regardless of the value of the asset. This eliminates the need to ask yourself if this is the right time to buy, and to accumulate capital over time.
More units of the asset are obtained when its price falls and less when its price rises, but the investment burden remains the same in each period. Smoothing your investment also smoothes your “average purchase cost” and reduces the impact of volatility on your portfolio.
What results for dollar cost averaging over the last two years of Bitcoin?
An investor who started buying bitcoins in September 2017 by investing €100 per week, regardless of the Bitcoin price, would have been through both the bubble at the end of 2017 and the bear market in 2018.
While these periods made the fortune or ruin of many day-traders, our investors would have remained imperturbable and would have methodically invested the total sum of 10500€ in 104 weekly purchases of 100€.
In September 2019, this investor would own 1.92 BTC, corresponding to a value of 18400€. A comfortable return on investment of 75%, which ranks amongst the winning minority of the market.
This investment method also has much less direct impact on the investor’s life. Where the day trader is often stuck to his screen and market charts, causing extreme emotions and portfolio fluctuations, the dollar cost averaging investment enthusiast can schedule recurring transfers with his banking partner corresponding to his savings capacity and then focus on other activities until his investment plan expires.
The dollar cost averaging method therefore adapts well to the profile of the medium- or long-term investor, who is able to allocate part of his savings to a particular asset, without wanting to recover all the potential capital gain in the very short term.
Day trading is actually aimed at more specific profiles, willing to take more risks and devote time to a discipline that requires a lot of technical and psychological skills, and generates a lot of stress.
The proverbial promise of a return on investment through an activity parallel to a traditional job can in most cases only be achieved through dollar-cost averaging, because it requires the least knowledge and supervision while offering an interesting return.
Coinhouse, through its Premium service, offers personalized support in which the strategy of dollar-cost averaging can be applied according to the needs and profiles of our customers.