Cryptocurrencies are way more volatile than normal currencies or traditional investments. The wild price swings have liquidated more than a few investors. Short sellers are getting crushed to the tune of $400 million and sob stories on the Reddit crypto forum abound.
But leading crypto exchange Coinbase has a solution.
It turns out that it’s one already used in traditional finance markets and is called dollar cost averaging (DCA).
In a recent blog post, Coinbase said, “DCA can be an effective way to own crypto without the anxiety of committing a significant amount of capital at a fixed price at a particular moment in time.”
Here’s how it works: DCA helps investors to weather market volatility by investing a set amount on a regular schedule, and it could also be a useful method of staying afloat, irrespective of market swings.
Let’s take the case of an investor who uses DCA to purchase $100 worth of bitcoin every two weeks. If the market crashes, that $100 will purchase more bitcoin, increasing the potential for a greater gain if the market turns around. Once the market does turn around, that same amount will purchase less bitcoin, reducing the losses that would accrue when the bullish run returns.
On its blog, Coinbase explains the rationale behind its recommendation:
“Cryptocurrencies like bitcoin have experienced price volatility in the past, with values swinging double-digit percentage points in a single day - and sometimes even in a single hour, Whenever the price starts to move, there’s no shortage of FOMO around whether it’s the right time to buy or not. As with any kind of investment, this can cause a lot of anxiety, uncertainty, or fear to participate at all.”
Coinbase believes DCA would help investors see opportunities in crypto’s market volatility through recurring buys. Little and often, as Grandma used to say.