One of the most popular investment strategies is dollar-cost averaging, and one of the most popular cryptocurrency exchanges on the web is Coinbase. So why not put the two together and get started on a dollar-cost averaging cryptocurrency investment strategy?
What is dollar-cost averaging?
First of all, what exactly is dollar-cost averaging? Simply put, it means spreading out your purchases of a given asset over time so that the price you are paying — the “dollar cost” — is never too high nor too low. That means, over time, your purchases of an asset — in this case, Bitcoin, or any cryptocurrency — will be “averaged” to a reasonable amount in order to reduce risk.
Why does dollar-cost averaging reduce risk?
Follow me here. If you purchased $1,000 worth of Bitcoin at the current price of $10,000, and the price of Bitcoin went down to $5,000 next week, your $1,000 investment would suddenly be worth only $500. You haven’t yet lost money because this investment isn’t realized — you didn’t sell, and it might go back up in the future. But what would happen if you had spread out that $1,000 investment in smaller chunks over time?
For this example, let’s just dollar-cost average across just two months. Say in one month you purchased $500 worth of Bitcoin at a price of $8,000. Then, the next month, you bought another $500 worth of Bitcoin at $10,000. You still would have spent $1,000, but you would have more Bitcoin than if you spent all $1,000 in the second month alone. That’s because when you purchased $500 worth at the $8,000 price, you actually got a better value for your money. That first purchase of $500 is now worth $625. At the $10,000 price point, you own a total of $1,125 in Bitcoin.
What happens now if the price of Bitcoin drops all the way to $5,000? Your $1,125 worth of Bitcoin is cut in half to roughly $562. That’s $62 dollars higher than it would have been if you simply dropped the $1,000 at the $10,000 level. Do you see how this works? You manage to salvage $62 just by splitting it up into 2 payments. Now, imagine if you split it up into dozens of payments over time. You might not even notice when Bitcoin drops from $10,000 to $5,000 because, over time, you average purchase price might have been even lower.
How to set up dollar-cost averaging buys on Coinbase
Now that you have a grasp on exactly how dollar-cost averaging works, let’s take a look at how exactly you set up dollar-cost averaging on Coinbase. The first thing you need to do, if you haven’t already, is sign up for Coinbase. You can use my affiliate link to get $10 extra in free Bitcoin after you buy or sell $100 worth of cryptocurrency, so feel free to do that if you like.
Automatic dollar-cost averaging vs. manual dollar-cost averaging
One thing you need to know before starting is that there are two ways you can go about dollar-cost averaging on Coinbase. You can set up an automatic purchasing schedule, or you can try to dollar-cost average purchase on your own. If you’re doing it manually, you’ll essentially be watching the market for what you think are low prices — there’s definitely some risk involved, because no one ever truly knows when the market is “low”.
Alternatively, I personally believe that an automatic cryptocurrency purchasing schedule has a couple of benefits. First, you’re able to “set it and forget it”. I personally get some level of anxiety from always watching the market and cryptocurrency market prices, but I know I want to buy in the long run. For me, setting up automatic purchases is a way for me to get my emotions out of my investing. Additionally, you’ll be less tempted to make bad moves such as under-purchasing at high prices and over-purchasing at what you perceive to be low prices.
I believe that someone who truly knows what they’re doing can easily make more profit by dollar-cost averaging themselves, but it requires high determination and discipline to make an investment strategy and follow through. Will you have the guts to make a large purchase when prices are low? Will you shy away from purchases when you think prices are high? A good investor will know how to make the best choices regardless of how they feel about their current portfolio or the state of the market.
With that said…
How to set up automatic recurring purchases on Coinbase
It’s pretty simple to set up automatically recurring purchases on Coinbase. After you have an open and established Coinbase account, simply head to the “Prices” tab where you’ll see all the top cryptocurrencies and their current prices.
From here, you’ll want to click on “Trade” either at the top-right hand corner, or next to the cryptocurrency that you want to set up recurring buys for. In this example, we’ll set up a bi-monthly purchase of Bitcoin at a set dollar amount.
As you can see above, all you have to do is click on the big blue “Trade” icon (which may change in the future — Coinbase recently did a complete overhaul of their website… the concept should remain the same, however).
Under “Buy” you can type in a dollar amount that you’d like to purchase at this time. (Remember, to get the bonus $10 in Bitcoin from using my affiliate link, you have to buy or sell $100 worth of cryptocurrency!) Just click on the small clock icon and then choose a timeframe by which you want your purchase to recur. I chose the 1st and 15th of every month.
From there, you can simply choose your payment method and then click on the big blue “Buy” button. You’ll immediately receive the amount of cryptocurrency you purchased into your Coinbase wallet, and then on whichever interval you chose, Coinbase will purchase that same amount in US dollars again. You will also get a confirmation email letting you know the transaction went through.
If you’re lost on the process, be sure to check out our full guide on setting up recurring buys in Coinbase.
If you followed these steps correctly, you should now be making automatic recurring purchases of your favorite cryptocurrency, and, whether you know it or not, taking advantage of dollar-cost averaging. Coinbase will track your purchase history over time. If you want, you can easily create a spreadsheet to help you understand how much you have invested and how much your current portfolio is worth in relation. Over time, you should find that — compared to your dollar-cost average — the swings of the market shouldn’t matter as much.
Let us know in the comments if you need any help, have any questions, or simply want to let us know that this guide helped you out.