If you’re investing in crypto, you’ve probably had mixed emotions this year. After major falls in January, most assets have ranged up and down week to week. But in times like these, gradually buying into your favorite digital investments can really pay off. And if you’re looking for a way to do that on the cheap, here's a strategy that should do the trick.
What is value averaging?
Value averaging (VA) is a bit like dollar-cost averaging (DCA), but with one important difference. With DCA, you buy the same amount of an asset each period (e.g. a week, month, or quarter) regardless of its price – the idea being to get a good average buying price over time.
With VA, the price of an asset directly impacts how much you invest each period: you buy more when its price is low, less when it’s high, and sell when it’s really high. The aim here is to lower your average buying price and raise your average selling price.
How does it work?
VA can work with any investment (crypto or otherwise), but here’s an example using bitcoin. Suppose you bought $100 worth of bitcoin today, and this time next month, you want to own exactly $200 worth. When next month comes around, bitcoin’s price has halved in value – your $100 is now worth only $50. To get back to your “value path,” you’d need to make a larger investment ($150 worth) to turn that $50 into $200 worth of bitcoin. In other words, the price of bitcoin went down, so you bought more at better value.
Let’s try that with two more scenarios. First, suppose bitcoin is the same price when you invest for the second time. Here, your starting $100 bitcoin investment would still be worth $100, so you’d buy $100 worth to get to your value path – i.e. you’d invest less than you would have if the price had gone down.
Finally, assume the bitcoin price tripled over the month. Well, your $100 would now be worth $300, so you’d have to sell $100 worth to get back to a $200 value. In other words, you’d take some profits because the price went up by a massive amount – a sensible thing to do, if you ask me.
You could extend this further into the future, with a value path going up by another $100 each month ($300, $400, $500, and so on). And you’d arrive at your value path each month by buying the shortfall or selling the excess of your investment to the value path.
The table below shows how this could have worked over the past 10 months, based on real bitcoin prices taken at the start of each month. You’d have bought more in January and February when prices were down. And you’d have sold some in November (blue row), when bitcoin was over $60,000.
Investment amounts with value averaging based on $100 monthly value path.
All in all, you’d have fared better with VA over the 10 months than you would have using a $100-per-month DCA strategy.
With VA, you’d invest a net amount of $934.49 (after subtracting bitcoin sales in blue above) over the 10 months – and still have 0.02195 bitcoin to your name at the end of it. That works out to an average buying price of $42,569.95 per coin.
With DCA, you’d invest an overall $1,000. That would fetch you 0.02233 bitcoin at an average buying price of $44,787.38 – over $2,000 higher than your average VA price.
Should you use the strategy?
VA makes a lot of sense because it forces you to buy more when prices are low and sell when they’re high. It also does this in a methodical way that removes emotions from your investment decisions – that’s going to be useful with most volatile crypto investments.
Like any strategy, VA has its flaws. For one, the price of your investment could keep dropping month after month. That would cause your monthly outlay to skyrocket, leaving you strapped for cash as you try to catch falling knives. With this in mind, make sure you have a good cash buffer to account for unpredictable cash flows, and set a maximum spending limit to stop yourself from throwing too much good money after bad.
For another, VA might underperform DCA in a strong crypto bull run. That’s because unlike DCA, VA makes you sell crypto (i.e. take profits) when prices get overheated. And while that’s usually the wise thing to do, you could end up with too small a crypto position if prices go up too fast.
All that being said, I think VA is a great strategy to consider if you’re looking to accumulate crypto at lower average prices, and sell at higher ones. That way, you’ll have a decent chance of profiting from crypto’s volatility – without having to watch the charts 24/7…
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