The “Dollar-Cost Averaging” Strategy For Your Euros - Also Applicable For Crypto Now!
Dollar-cost averaging is an investment strategy that allows you to mitigate volatility by buying an asset at a regular interval. It’s the founding principle of most private pension schemes. You can set it up for the Crypto Autopilot
TL;DR: You can set up the same strategy with OSOM to make regular deposits without the need to do anything manually 🔁 by setting up a recurrent bank transfer 🔁
🦾 For the Crypto Autopilot, to your deposit ID that has the following format "ATP00000XXX". Find it in the app by going to Wealth > Crypto Autopilot > Add Funds > Add Euros > Bank Transfer.
💰 For DeFi Earn, the deposit ID will have the format "DFE00000XXX" and you will find it in Wealth > DeFi Earn > Add Funds > Add Euros > Bank Transfer.
But you might want to read on to see what a 10% crypto allocation can do to your overall portfolio returns 😉
While the average trader will “bet” several hundred or thousands of euros that the price of crypto will move up or down in the short term, the crypto investor might want to look at things a little differently.
Trading and investing are two very different things. Trading is about spotting and exploiting short or very short-term opportunities (usually from a second to a couple of months at most) while the other involves looking at multi-year trends and carefully constructing a portfolio of different assets to reach one’s goal with regard to the risk one is able to take; those goals are usually long-term, multiple years into the future.
An investor must start with an objective and devise a plan to achieve it. Once the objective is set, she will have to consider which asset classes to allocate to whichever part of her portfolio (see this article on “Adding Crypto To Your Portfolio”). Next comes the question of how and how often to buy these assets. The “dollar-cost averaging strategy” (DCA) posits that she should buy as often as she can.
What is the dollar-cost averaging strategy?
It is best summarized as the following: invest the same amount of money on a schedule, and do not look at the price of what you are buying.
It is a strategy in which the investor divides the total amount to be invested across periodic purchases of an asset so as to reduce the impact of short-term volatility on the overall purchase. This means that an investor will buy the asset, no matter the price, on a regular, set time basis (for example, weekly, monthly, quarterly).
This decreases the likelihood that you just happen to buy in, with a large amount of money, on the day that your asset is at its most expensive that year. It also removes all the work and stress of timing the market, to try to purchase at the best price since (1) this has pretty much been proven that it is not possible, (2) the time horizon is in years so it doesn't really matter (3) you have better things to do with your life and it is a very good compromise; especially since it requires zero work.
Additionally, employing such a strategy reduces the effects of our all-too-human cognitive biases. By setting and forgetting a plan (and reviewing it once a year or so), an investor is at much less risk of making counter-productive moves out of fear or greed, such as selling in a panic (panic-selling) or buying out of a fear of missing out (FOMOing).
Who uses the DCA strategy?
Pretty much all private pension programs in the world. The way they work is almost universally the same: you make monthly contributions - from your paycheck and/or by your employer - to a fund, regardless of the price of the fund on your payday. Over the course of the year, you have more or less paid the year’s average prices for a share in the fund, whereas if you had bought it all at once you could have been strongly impacted by short bursts of volatility ).
Here is a very simplified example of averaging your cost into a fund as opposed to buying it all at once. Using the prices of IMIE.
How often should you buy?
The short answer is whenever you can.
Since the objective is to smooth out volatility, and as buying more often will do just that, the more often you can buy, the better. So, especially for something as volatile as crypto, buying hourly or daily would really be ideal. But whether in crypto or traditional markets, there will usually be limits under which you can’t buy or fixed transaction fees that don’t make it possible to buy very small amounts.
Your broker might, for example, impose a fixed fee or a minimum fee on your orders, making it so that an order of less than €1000, while doable, is not cost-effective. Therefore, it might be best to enter every time you have €1000.
In the Crypto Autopilot, we have a minimum purchase of 0.002 BTC. Therefore, you could make a purchase whenever you have about €100 to add to the Autopilot (if the price is €46’000 per Bitcoin).
It also works if you are not tied to a scheduled paycheck scheme. If you have a big pile of money you are looking to invest over the next six months with the Autopilot, just see how many deposits of €100 you can do to “cost-average” your way in. If you have €10,000 to invest, you could deposit €100 a day over the next 100 days. We do not have any fixed fees, so it’s easy!
Crypto in your retirement portfolio
Our hypothetical investor from the previous article, 33-year-old Jane has decided that her strategy would be to invest €700 every month towards retirement beginning on 26 September 2019. She calculated that she needs about €800,000 for retirement from her own savings and with 6% historical returns in the equity markets, it should be enough.
Jane has decided that she will allocate 90% to buying a very diversified index fund and that she will put 10% in crypto. She knows crypto is riskier but even if it all goes to zero, with a €630 euros contribution, she will still hit her target of €800,000 in 35 years. And she figures that if crypto does as well as she expects, she might even be able to retire a couple of years earlier, so to her, it’s worth the risk.
With each monthly paycheck, she has a choice to make: enter the market on a monthly basis as the paychecks come in - a “monthly” dollar-cost averaging strategy - wait to do it quarterly, or wait until December when she has saved a year’s worth of pension contribution and make all her investments then. If you look at the table above, you’ll see that investing monthly is the best way to smooth out volatility
To simplify, let’s assume she puts 10% in the Crypto Autopilot and 90% in IMIE.PA, an ETF that tracks the MSCI ACWI IMI index, is composed of around 9,000 companies all over the world.
For simplicity, let’s make the following assumptions and simplifications about Jane when investing:
- The Autopilot is tradeable 24/7/365 but traditional markets only trade during the week, so we’ll just extrapolate the values of the previous day when the markets are closed.
- €630 might be a bit below the amount for an ideal trade (which is more often around €1000 to optimize fees), but let’s keep things simple.
- The current minimum to enter the Autopilot is €100, but since it is dictated by the price of Bitcoin and has been much lower in the past, we will simplify and assume she can always enter at 70€.
- The values used for the Crypto Autopilot don’t take performance fees into account.
- The values used for purchasing IMIE don’t take any brokerage, asset management, or safekeeping fees into account.
- We assume Jane always gets paid on the 25th of the month and invests on the following day, the 26th of the month.
Here is how her portfolio would have fared from 26 September 2019 until today, and how we project the future performance based on our forecasting model with confidence intervals.
This simulates investing 700€ a month. The simulation goes from 26 September 2019 to December 31, 2021. The data from September 26, 2019, to March 8, 2021, is actual data, the data from March 9, 2021, to December 31, 2021, is forecast data
How can I utilize DCA with OSOM?
We can’t help you just yet when it comes to buying ETFs. Because we think it’s a smart way to invest, we created a unique Autopilot deposit ID for every OSOM customer, which you can use if you want to make a deposit into the Autopilot directly from your bank via a bank transfer.
You can find it in the App by going to Crypto Autopilot > Add Funds > Add Euros > Bank Transfer. There you will find a deposit code in the following format “ATP00000XXXXXX”.
If you use that deposit code in the communication field of your bank transfer, your euros will be converted automatically into BTC and deposited into the Autopilot immediately upon arrival. There is no manual work required! It also means you can set up recurring payments into the Autopilot regularly without ever even needing to open the app! 💸
If you want to make a deposit into the Autopilot regularly, this is much more convenient than having to deposit on the OSOM Euro wallet (for which the format is “OSM00000XXXXXX” ) and then manually making a deposit into the Autopilot once the money has arrived.
This is not investment advice, nor a solicitation. Crypto markets possess a high level of risk, including volatility and regulatory uncertainty. Past performance does not constitute a guarantee of future results in any way. You are solely responsible for doing your own financial, legal, tax, or investment research before taking any actions.
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