Everyone who would like to invest in cryptos asks the question when is the right time to do so. Cryptocurrencies, such as bitcoin, are subject to significant price fluctuations, some of which can even occur on an hourly basis. Volatility in particular can always be responsible for a lot of uncertainty and possibly missed opportunities with any type of investment. Regardless of these fears and uncertainties, the Bitcoin Wallet Test shows everything you need to know about the best wallets. But how do you actually find the best time to buy cryptocurrencies now.
A simple basic rule helps
The principle sounds extremely simple at first, however, the implementation is then already significantly more difficult. It says to buy when prices are low and sell when prices are high. Since there is high volatility on the crypto market, which can lead to prices changing even every hour, it is not that easy to follow this principle. Therefore, many investors rely on a very specific strategy in this regard. It is called the average cost effect. This is also known by the abbreviation DCA (Dollar-Cost Averaging). Here, everything is about reducing the effects of market volatility. This is achieved by the investor investing small amounts on a regular basis. The dollar-cost averaging effect is particularly useful for investments that can be expected to increase in value over the long term, even though, or precisely because, they are always subject to price fluctuations.
This is the average cost effect
The average cost effect is a long-term strategy. Here, smaller amounts are paid into the selected financial product over a certain period of time. However, no attention is paid to the respective price. It is possible here that the investment schedule of the average cost effect changes over time. Depending on the personal investment goal, it can run for several months or even several years.
Especially when investing in cryptocurrencies like bitcoin, the average cost effect is a popular method. However, it is also used in many other asset classes. This primarily concerns asset classes that are subject to high volatility.
Average cost effect and the advantages
Especially when investing in cryptos, the average cost effect can be an effective method. This is because here you do not have to pay attention to when the supposedly optimal time for the investment has come. In addition, one does not run the risk of investing a one-time amount at a price peak of all times.
The decisive factor here is that an amount is chosen for the ongoing, i.e. regular, investment that can actually be afforded. However, the price of the actual asset is irrelevant. In this way, one then has the real chance of achieving a favorable average purchase price over time. Here, at the same time, the effects of sudden price losses are reduced overall.
The effectiveness of the average cost effect
The average cost effect can help to find a safe market entry. Moreover, one can benefit from long-term price increases and at the same time the risk of short-term price declines can be reduced.
Whenever an investor expects that the prices of the financial product will fall in the near future, but in the long term he expects that the prices will also recover, the average cost effect can be used.
Investors invest with the average cost effect at prices spread over time. So the goal of this strategy is to average out price gains and losses while benefiting a bit from price movements in both directions.
How the average cost effect works
With any strategy, success still depends on what happens in the market. For a better understanding, consider the following example. Assuming an investor had invested US $100 in bitcoin every week since December 18, 2017, the investment would be US $16,300 by January 2021. As of January 25, 2021, the value of the portfolio would have been approximately US $65,000. Thus, that would be a return of about 300%.
On the other hand, the situation would be different if one had decided to make a one-time investment when the share price was at its peak. Returning to the aforementioned example, it would now be the case that one would have invested the amount of 16,300 US dollars completely on December 18, 2017. In this case, one would have suffered a loss of approximately 8,000 US dollars in the first two years. The portfolio would recover here as well, but here there would have been the risk of eventually selling the Bitcoins again because of the losses.
The average cost effect is based on hedging. The potential gains are reduced on the one hand and on the other hand possible losses are limited. Thus, the average cost effect ensures that the probability of the portfolio suffering heavy losses due to short-term price fluctuations is significantly reduced.
Certainly, the average cost effect is not the right strategy for every investor. Here, everyone really has to find out for themselves whether it is the right investment strategy. However, it is always advisable to consult a financial expert who will take into account your personal financial possibilities and your personal risk tolerance.