When it comes to buying and selling, it is best to buy at the lowest price possible. Isn’t it straightforward? Traders, investors, and financial advisors worldwide rely on it as a foundation. It appears simple. But is it really that simple? Probably, everyone knows the buy-cheap-sell-high guidelines, and that is all you have to do in this case to earn a lot of money. But why does it appear that just a tiny percentage of the market participants can profit? They always say, buy cheap, sell high, but when making final decisions, they end up purchasing high and selling low when the time comes! Why? Let us discuss further.
Some traders end up buying high & selling low because of their emotions. When the price of an asset rises, people feel delighted and keep hoping for it to rise even higher. The lottery prize price is an excellent example of this. Even those who did not gamble back then throng into long lines as it hits about a billion highs.
When assets fall in value, though, people get worried. They liquidate their possessions quickly, believing that they will lose value eventually. Consequently, the market value of a coin or stock diminishes. This trait is the nature of the market. It is a portrayal of widespread human feelings such as fear and greed. When you have a thorough grasp of the market trend, you will learn to resist the emotional fluctuations that are unavoidable in trading and investing. This concept is known as value cost averaging.
What Is Value-Cost Averaging?
The method of investing a predetermined amount of money is known as value-cost averaging. You might, for example, invest $500 in an asset on a monthly or bi-weekly basis, regardless of what the asset price is on that particular day. Because it is a one-time method, it is simple to implement. According to research, this technique is one of the greatest and most effective long-term investing methods. It is tough to know when to buy because the market is changing continually. Only 0.0001 per cent of the population may be capable of doing so. You can eliminate emotion from the equation by using dollar-cost averaging, making it easier to decide whether to invest.
It is tough to trade. It is one of the most emotionless and robotic jobs, and not everyone is up for it. As a result, cost averaging came to exist to successfully eliminate the stress, volatility, and emotion associated with investing. Let us look at an example to grasp cost-averaging better. Let us imagine you have money, and your grandma has left you $10,000. You are ready to put money into Bitcoin, and you have two alternatives. The first is to make a single $10,000 investment. The second option is to release a proportional investment of $1,000 for ten months. Lump-sum investment is the first, while dollar-cost averaging is the second.
Possible Scenarios: Lump sum versus Cost averaging investment
Here is the first scenario. Let us say you invested at a time when the price of bitcoin goes upward. You bet it all, USD 10,000 at once. Imagine that in 10 months, the value of your position goes down to USD 7,650. It is -23.5% lower compared to when you started.
Consider a different scenario. You decide to invest $10,000. Instead of investing it all at once, you considered investing USD 1,000 per month for ten months. Assume that you also invested throughout the same period of scenario one and that your investment schedule is USD 1,000 each month regardless of the price of Bitcoin. You do not look at the market. You do it as if you were paying a utility payment. When you examine the market value of your position, you will notice that your investment value does not change. You keep the $10,000 investment.
When you compare the results of each investing approach, you will notice that cost-dollar-averaging outperforms lump-sum. However, the advantage of a lump-sum payment is that you do not have to think about when to buy. Once you have figured out which investment method best suits you, you can go to a crypto trading platform that welcomes newbies, such as bitcoin-prime.net to start trading.
The Advantages of Value-Cost Averaging
- When the price of an item rises, you can buy fewer units — and when the price of an asset lowers, you can purchase many units.
- Because your money is designated for a specific period, you can avoid the risk of FOMO or the fear of missing out.
- You are not required to make decisions based on emotions. You did it when you initially started your financial path.
- You may get tempted to target a specific market. You do not have to stress yourself out by watching the market move on your computer screen all day.
- One does not need a bunch of capital to get started. You can start small, and soon your portfolio may grow and compound.
- Avoiding the buy high, sell low mentality is also a way to keep your money in the bank.
It is no surprise that emotion is an essential deterrent to trading and investing. The cost-averaging method should be based only on facts and not on feelings.
To Sum it Up
The dollar-cost averaging approach intends to make it easier to make financial decisions. If you compare it to a lump-sum investment approach, you will need a lot of knowledge and confidence to predict what the market will do next. Professionals who are already on the market are among the most regular consumers.
However, not all investors are capable or skilled in doing so. As a result, the lump-sum strategy is either unsuccessful or unpleasant. On the other hand, dollar-cost averaging is not very stressful. Shares, real estate, ETFs, mutual funds, bonds, and cryptocurrencies are all examples of markets that apply. Once you have identified the investment strategy that suits your preference, study further. Remember that this strategy is just one of the several strategies you should consider. In addition, a technique may have to mix with other tactics at times. As a result, you should pay attention to the dynamics as well. Because the crypto market is so unpredictable, only put money in it that you can afford to lose. You may win a lot of money, but you could also lose a lot.