January 24, 2022
Dollar-cost-averaging is a popular investment strategy for a reason: time and time again it proves to give a higher final value¹ to your money - without the market hassle.
Written by Amy Wilkinson
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*This blog is not intended as financial advice. This is the personal view of the author only. Ā Consider professional independent advice. There are risks in trading Bitcoin.
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When it comes to our personal finances, many of us might have fallen into the trap of looking for a 'quick win' once or twice. Over the last decade or so, an increasingly popular (and relatively high-risk activity) that falls under this, is buying cryptocurrency based on market hype.
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If you're reading this, you're probably familiar with the world of digital assets already, so you may have heard words (but never from Mode) along the lines of "now is the best time to buy" uttered once or twice before.
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This narrative, regardless of the asset or currency mentioned, is pretty alarming. The fact is: there is no "best time to buy". As with any asset or currency, the value of Bitcoin and other cryptocurrencies can go either up or down. Some people have made serious money in recent years from trying to buy market āhighsā, but others have lost just as much too.
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When applied as a regular investment strategy, this type of thinking is better known as 'timing the market', but with bigger bets comes bigger risk, and the more you try to time the market, the more vulnerable your funds can become.
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Let's take a look at how this could hypothetically play out:
š° You have Ā£1,000 that you would like to move into digital currency.
š£ You tell a friend, who thinks they are being helpful by offering a suggestion that "now is the best time to buy Bitcoin" (which, unless your friend is a qualified and insured financial adviser, theyāre likely just laying their FOMO on you and this is - unsurprisingly - pretty far from helpful).
š Ā You then look at the price performance of Bitcoin, and you see that it dropped in value recently by 10% (bargain, right?).
š¤ You take your friend's advice and put your total budget of Ā£1,000 on one Bitcoin purchase in one day.
š Three weeks later, you see the price of Bitcoin has dropped another 8%, meaning that for the time being, you've lost some of your capital, and any further price dips will have a direct negative impact on your total funds.
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Now, an important thing to note here, is that whilst you can look at historical data to determine the chances of that asset or coin's value increasing (meaning you'd make more gains the more capital you invest), market fluctuation depends on a plethora of external contributors. In fact, even a tweet from Elon Musk can inflict price volatility, so you can never be sure your bet will turn out the way you hoped it would.
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At Mode, we really back Bitcoin. We believe in the longevity of Bitcoin and are firm supporters of the idea that time spent holding your Bitcoin in the market is more valuable than trying to time the market. That being said, there are no insurances or regulations by which to measure or predict Bitcoin, so anything spent on Bitcoin could run the risk of losing value. Itās always worth doing your own research on any financial opportunities youāve heard about, and considering what youāre willing to lose before making any purchases or sales. If you have any concerns, seek professional independent advice.
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One strategy that has become increasingly popular within cryptocurrency trading due to its relative risk aversion is called āDollar-Cost-Averagingā, or, āDCAā.
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The simple structure of DCA has gained traction in both traditional stock purchasing and crypto purchasing alike, due to the idea that applying the strategy removes the stress of trying to time the market, and can reduce the impact of volatility on the overall purchase while still maintaining opportunities for financial growth.
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With DCA, you divide up the total of your chosen spend on any given stock, asset, or currency periodically, irrespective of its value at the times youāll be making purchases (naturally, if the value plummets you might want to reconsider your set up).
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Hereās how it works š
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Yep, we know - thatās a lot of words for a āsimpleā strategy. Hereās how different a one-off purchase could look compared to a DCA strategy:
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The popularised term, āDollar-Cost-Averagingā was first coined by investing pioneer Benjamin Graham back in 1949 and the strategy has stood the test of time for a good reason. While a one-off investment or crypto purchase might result in higher returns on your money, itās not guaranteed, and DCA can offer a lower-risk option for your hard-earned funds while still producing a pretty penny in return.
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At Mode, itās in our DNA to ensure that weāre always bringing you the hard facts when discussing cryptocurrency trading, so that you can make an informed decision yourself.
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We're not here to sell you flowers and unicorns, and it's important to understand that all investments and cryptocurrency purchases come with risk.
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While Dollar-Cost-Averaging can be a really rewarding route to growing your Bitcoin, your capital is still at risk when applying the strategy in your own financial decisions. Weāre here to support you through every step of your Bitcoin journey, but we always recommend doing your own research before making any money moves, and itās important you understand we do not give investment advice. Opinions here are solely of the author.
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*Not financial advice
*Fibermode t/a Mode is FCA registered as a Cryptoasset firm (FCA 928786). Bitcoin is not regulated in the UK. The value of Bitcoin can go up or down (or can drop to zero), and there can be a substantial risk you lose money.
*There is risk associated with Bitcoin trading. Read more here: https://www.modeapp.com/protection
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