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What is Dollar-Cost Average, and How to Utilize it for Crypto Investments?

Jan 19, 2021
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byNDAX Labs


Sometimes investment stories can be more interesting than fiction. We’ve all heard stories of people who invested a small amount in a company’s stock or other assets that brought in returns worth tens or even hundreds of millions of dollars. Some of these investors were lucky, but others, really smart.

One such investment story in the cryptocurrency industry is about the thousands of percent in return one may have earned if they invested $1 every day for the last five to ten years in Bitcoin. As strange as it may sound, it’s true. It would have been made possible due to a mathematical concept called dollar-cost averaging combined with the extraordinary growth of Bitcoin over the years.

                       


                           

What is Dollar-Cost Averaging and How it Works

Whether or not you’ve heard the term before, you are likely already aware of the concept of dollar-cost average. Dollar-cost average is a strategy where investors invest a fixed amount of money into the same asset at fixed intervals for a period of time. This method is standard with mutual funds, where investors usually allocate a small amount in a mutual fund every month irrespective of its price.

Dollar-cost averaging allows you to buy smaller amounts of an asset over a long period at different prices rather than buying a huge chunk at one price point. As the cost of assets moves in a zigzag manner, investing at regular intervals allows you to buy an asset at an average price.

To understand this better, suppose investor A invested $2,400 into a cryptocurrency valued at $10 at the time of purchase. He now owns 240 units of the cryptocurrency he invested in.

On the contrary, investor B divided the same $2,400 into 12 monthly investments of $200. The price of the cryptocurrency fluctuated both ways during the 12 months. There were some months when B paid more than $10 per unit, while on other months, he paid less than $10.

At the end of the 12 months, the average price B paid per unit of the cryptocurrency equalled $9.5. After 12 months, B now owns 252 units of the cryptocurrency.

At the end of 12 months, if the cryptocurrency’s price is $11 per unit, investor A’s investment of $2,400 will have a value of $2,640. While investor B’s investment of $2,400 will be valued at $2,772.

                               


                                     

Benefits of Dollar-Cost Averaging

Many investment “gurus” share the idea of “buy low, sell high.” It sounds straightforward. If you buy a stock or cryptocurrency at a lower price, say $100, and sell it at a higher price, say $120, you profit from $20.

And when you look at the price charts of these assets, it may seem obvious where you could’ve bought and sold the asset to make a hefty profit. In practice, though, it is anything but simple.

Even the most experienced investors and traders consider it almost impossible to perfectly time a market. This conveys how difficult it is to know when an investor should enter or exit the market. Due to all the involved complexities, trading daily may not be everyone’s cup of tea, but there are ways you can ace the market with minimal efforts; one way is dollar-cost averaging.

                       


                     

Advantages of Dollar-Cost Averaging
 

Forget complex price movements. Invest consistently

As more institutional and retail investors enter the crypto markets, prices of cryptocurrencies are gaining stability. However, you may still not want to take any major risks with your money.

So, if you do not want to indulge in the complexities of price fluctuations and want to invest more safely, an option is to follow the dollar-cost averaging approach.

                   

No need for a large sum of money

Investing a considerable amount at once is not possible for everyone. The dollar-cost average approach can be a good choice for investors looking to slowly entering the cryptocurrency market.

For example, you may not be able to make a one-time investment of $12,000, but investing $100 per month for the next ten years may be easily possible for you.

             


                                     

How to Calculate Dollar-Cost Average

You can calculate the dollar-cost average of your total investment using the formula:

Dollar-Cost Average = Number of periods/ ∑(1/Share Price on investment dates)

The number of periods is the total number of investments you made at regular intervals in a particular asset. The Share Price on Investment Dates is the price you paid for the asset every time you invested in it.

So, if you made 5 monthly investments in a cryptocurrency at $200, $190, $180, $220 and $210, the dollar-cost average will be:

= 5/{(1/200) + (1/190) + (1/180) + (1/220) + (1/210)}

= 5/{0.005 + 0.0053 + 0.0056 + 0.0046 + 0.0048}

= 5/0.0253

= $197.63.

This means, after five monthly investments, you would have paid $197.63 on average for the cryptocurrency.

If you made a one-time investment, your returns would have been lower than if you used the dollar-cost average method. But this may not necessarily be the case all the time. There is a possibility that the average price may be more than the price during the first payment.

                   


                             

Why Setup Recurring Crypto Purchases?

Cryptocurrencies can be volatile, and it is hard to predict their flux. Recurring purchases are an effective solution for traders looking to invest at an average price over a period.

As we mentioned earlier, if you had invested $1 every day for the last five or 10 years into Bitcoin, you would have earned thousands of percent in returns.

Investing $1 daily into Bitcoin five years ago would have multiplied your capital by 12 times as of February 2020. Doing the same for the last nine years would have made you $18 million as of November 2019. That would have happened despite the multiple severe bearish markets and Bitcoin price drops from time to time.

                   


                     

NDAX’s Recurring Crypto Purchases

NDAX recurring crypto purchases enables Canadian crypto investors to reap the benefits of dollar-cost averaging. NDAX users can set recurring crypto purchases as low as $10 to buy their favourite cryptocurrencies; daily, weekly or monthly automatically.

To do so, you will need to choose your asset, enter your investment amount and provide the time interval at which you would like to make your recurring investments. Follow theses steps:

  • • Select Recurring Purchases on the left-hand sidebar
  • • Select the Green plus sign (+) in the bottom right-hand corner
  • • A pop up will appear
  • • Fill out the NAME to help you identify the purchase
  • • Enter a selected time frame under PERIOD
  • • Enter the CURRENCY, and the AMOUNT in Canadian dollars
  • • Click CREATE
  • • You have successfully created a recurring purchase

By integrating this feature into our cryptocurrency trading platform, NDAX makes cryptocurrency investing more accessible for Canadians, no matter how much they are looking to trade.

With the launch of recurring crypto purchases on NDAX, Canadian cryptocurrency investors have more options to invest in the crypto markets. NDAX's feature-rich trading platform gives both beginner and advanced traders a world-class trading experience to buy, sell, deposit and withdraw Bitcoin, Ethereum, Litecoin and other high market-cap cryptocurrencies with unmatched security.

Note: There is no guarantee that you will make a profit on your investment using recurring purchases.