Right off the bat – There’s no perfect strategy for trading bitcoin and other cryptocurrencies. However, the pound-cost averaging model can be a great way to make market volatility work in your favor. You should also keep in mind that our discussion here is strictly for informational purposes. CM Tribe doesn’t provide crypto investment advice and this guide should not be viewed as such. As always, be sure to make your own independent assessment of whether any particular asset or investment strategy is in line with your financial capacity and risk tolerance before making any investment decisions. When in doubt, consult your financial advisor.
What is Pound-Cost Averaging?
Pound-Cost Averaging or PCA is a financial market concept many investors are currently utilizing in the cryptocurrency space. In simplest terms, PCA refers to a strategic move to buy the same pound sterling amount of a crypto asset at regular intervals regardless of the prevailing market price of that cryptocurrency on such intervals. And this is applicable to all the other currencies, not only pound sterlings and dollars.
If you’ve been following the developments of the crypto industry, then you already know that the market is wildly volatile. Now whenever market prices start to move, there’s no shortage of FOMO (Fear of Missing Out) across the board on whether it’s the right time to buy or not. For beginner traders, this can cause a lot of anxiety, uncertainty, or even prevent them from participating at all.
By utilizing the pound-cost averaging model, investors can smooth out the effect of market changes on the value of their investments over time. It is also a proven way to achieve some peace of mind because it essentially helps limit risk exposure by taking advantage of market corrections. That being said, it’s important to note that PCA requires discipline not to cancel or suspend regular GBP investments even if markets continue to trade in the red for the time being.
How Does PCA Work in Crypto Investing?
In post-cost averaging, we first start by deciding how much money to set aside for investing in a cryptocurrency. Some crypto exchanges also allow you to place a standing order on your bank account or credit card to automatically transfer the daily, weekly, monthly, or quarterly portion into the account that funds your crypto investments.
PCA as an investment strategy opens the potential to reduce the average cost of the total amount of crypto assets that you purchase. As a result, you could be buying less of an asset while the price is relatively high and more units of that asset as the price goes lower. This lets you enter a position in the market gradually, instead of going all in on a single move.
Suppose you decide to spend £200 to buy Bitcoin every week — when the market value is down, your £200 will buy you more bitcoin, which means there’s a higher potential for increased gains when the price goes up. When the market is up, that £200 will buy you fewer BTC but also reduces the risk of loss should the market go down.
Why PCA works for crypto investments
Even though it’s been available for years, the cryptocurrency space is yet in its infancy stage and we are still in the process of mass adoption across the globe. As such, the crypto market remains quite volatile and prices of assets continue to be wildly unpredictable. If you’re a beginner investor or are simply optimistic about the long-term growth potential (Hodler) of cryptocurrencies like BTC, ETH, and XRP, then you probably already know that there’s really no sense in trying to time the short-term swings of the market.
Instead, the main objective here should be to accumulate as many crypto assets as you can with whatever GBP amount you are comfortable investing. In that sense, pound-cost averaging is the best way to achieve this.
Another compelling benefit of pound-cost averaging in cryptocurrency is that it removes the emotional component of your decision-making process. This allows you to continue on a preset course of buying a certain pound sterling amount of your preferred crypto asset regardless of how wildly the price jumps up or down. In doing so, you will not bail out of your investment when the market experiences a massive drop, but rather see it as an opportunity to obtain even more crypto assets at a lower cost.
Utilizing PCA also helps you build up a positive money habit. At the very least, it lets you make investing a habit. Remember PCA is focused on the long term so, over time, you’ll get used to drip-feeding your GBP into crypto investments, which with constant practice, can stick with you long term. Eventually, it can make investing a regular part of your financial plan as opposed to something you just think about every now and then. Even small deposits can deliver considerable gains over the long term, more so when you consider the effect of compounding.
Are there any drawbacks to pound-cost averaging?
There are always downsides to any investment strategy and PCA is no exception. For one, you may miss out on some good buying opportunities since you’re not exactly timing the market and are simply purchasing crypto assets at set intervals.
Another drawback of PCA is that it takes time to reach your desired exposure level. Regular small purchases are at the core of a pound cost averaging strategy, so it will take some time to achieve your investment target. For instance, if you had enough cash on hand to buy 1 BTC now, you could simply do so and not worry about it anymore, but with PCA, you’ll have to commit weeks, months or even years to obtain that 1 BTC.
Lastly, there’s always the potential that a PCA strategy will yield lower returns in a strong bull market. For example, if BTC enters a bullish period throughout the time that you will be using PCA for your BTC investments, then it might be best to just make a lump sum investment since the next time you would pound cost average, the price would be likely higher.
Nevertheless, the upsides to pound-cost averaging outweigh the downsides, especially if you are new to the cryptocurrency scene and don’t know much about technical analysis or don’t have an in-depth understanding of the underlying technologies behind cryptocurrencies.
The Bottomline
PCA will not necessarily make you a better crypto investor overnight, but it can help optimize your cryptocurrency purchases so you can get the best value for your money. That being said, you should also consider how long you plan to invest for– the general rule of thumb is to for at least one or two years, so your portfolio has a greater opportunity to ride out dips in the market. Want to learn more about crypto investing? Check out the CM Tribe Learn series today. Or visit our Resource Center for more helpful info on how crypto can work for you.