Creating an Average Position in a Volatile Asset Like Crypto

Take the Edge of Crypto Investing With Dollar Cost Averaging

If you don’t have to skills or headspace to try to time the bottom and top of the insanely volatile crypto market, one tactic to employ is building an average position via dollar cost averaging.

Traditionally dollar cost averaging is done by making incremental buys over time (hours, days, weeks, months, years) regardless of price to “build an average position.” However, I would suggest aiming to do this when prices pull back when working on longer time frames, because this is a common occurrences in the quick moving crypto market.

This sort of tactic can be used as an investor to build a long position to hold, or as a trader to build a position to sell, or it can be done to do a mix of these things (one can also average selling to sell an average price if that suits them as well).

Dollar cost averging isn’t necessarily the best way to get a lambo, but it is a great way to ensure you don’t lose your shirt.

This tactic works well enough in bull markets like Bitcoin 2016 to 2017, but it ends up being somewhat unnecessary in those cases (as the only thing you are hedging against is a sudden downturn, and when that never or rarely comes, you end up with a slightly higher price than had you just gone all-in from the start or “bought the dips“).

On the other hand, the tactic works well in a bear market compared to aggressively buying and holding. At the first drop to $13k from $20k-ish many “bought the dip,” that worked out well if you sold, but if you held it did not (at least as of mid-April 2018). Now, imagine a world where we go to $1k Bitcoins from here (scary, but let’s just imagine it), that is $12k worth of losses for that $13k buyer per Bitcoin.

Compare that to someone who bought an average position on the way down and still has money to spare. They have an average price of let’s say $6k, but they also have money to spend on $1k Bitcoins if they choose. There is just no comparison between those two positions for holders (and even for traders averaging this makes sense, as it avoids mistiming a buy or sell and can be used in place of things like tight stop losses).

Meanwhile, since this tactic works well in both bear and bull markets (and in stagnant markets by the way), it makes a even more sense in uncertain and volatile markets like the current crypto market we find ourselves in April 2018. If you don’t know the direction of the market, if it seems to be bullish one day and bearish the next, then it makes sense to take a position that allows you to benefit either way.

Essentially dollar cost averaging (or more generally building an average position) ensures that regardless of which way the winds blow, we will find something to celebrate (either cheaper coins to buy, or gains on the coins we bought already).

Dollar cost averaging sacrifices potential gains for safety and flexibility. That is a trade-off, but it is potentially a trade-off some may be glad to take.

If you aren’t a gambler, but like crypto, tactics like dollar cost averaging can go a long way to taking the edge off.

The reality is the price aspect of crypto can be consuming and overwhelming and distract from every other aspect and lead to making bad trades. We can see evidence of this all around us by looking at the conversations that happen in the crypto community and in the media that reports on it.

Without a fair price of a Bitcoin based on fundamentals or a solid accepted economic theory, the price must come largely from speculation. The speculation of the 24/7 global, low volume, and lightly regulated market is intense. And if you don’t brace yourself, it has a chance of consuming your mental state and wallet.

Thus, the value of conservative tactics isn’t just in protecting your wallet, it is also a matter of protecting you from internalizing the crypto chaos.

With all that covered, let’s do another quick example of how dollar cost averaging can help, in this example we’ll discuss how it can help avoid the worst of what economic bubbles (which are common in crypto) have to offer while giving you a shot at gains.

If you started creating an average position last October and took no gains, then you should be somewhat broken even by now (the current price is $8.25k here on April 19th, 2018). Consider, you were buying between $6k and $20k BTC, but had very little time to buy in the higher range as the price didn’t stay there long, so most of your buys should be between $6k and $11.k, and thus you should have an average price of about $8k or maybe $9k or so. Further, you have cash on hand, so if we go down, you have money to lower your average price.

This strategy, if one didn’t take any gains at $20k, underperformed buying at a few key moments when the price was low between October and now, and it underperformed people who bought Bitcoin early, but importantly it drastically outperformed going all-in in the $10k+ range in a fit of FOMO.

Meanwhile, if one took incremental gains, or timed anything close to the top and then started averaging in again once crypto came down a bit, they are likely sitting on profits.

That is a good range of outcomes, none are get rich quick outcomes, but most of the possible worlds involve either gains, stagnation, or minor losses. That is much better than the 80% losses some who bought at the top and panic sold took, and that is better on-paper than the 70% losses some are currently sitting on now (cryptos are up like 30% – 60% this week, but they are still down considerably from their highs, many still down about 70% or so).

For some people crypto is about making lambo money by speculating. For others it is about being along for the ride and investing in an exciting new technology without committing too much of their headspace or bankroll to the price of the moment.

If protecting your headspace and bankroll while being in crypto is the goal, then averaging into cryptos over time is a move worth considering. It isn’t the only tactic that accomplishes this, but it is an easy to implement one that can leave you in a fairly hands-off state with crypto (other tactics like hedging with a short position and setting stops require a more hands on approach).

Author: Thomas DeMichele

Thomas DeMichele has been working in the cryptocurrency information space since 2015 when was created. He has contributed to MakerDAO, Alpha Bot (the number one crypto bot on Discord),...

Leave a comment

We'll never share your email with anyone else.