- A growing number of people are interested in buying virtual currencies.
- Cryptocurrency investing can present unique risks.
- Dollar-cost averaging could reduce the likelihood of losing money.
Should you consider taking this approach to buying crypto?
Cryptocurrency investing is something many Americans are embracing as there's undoubtedly the potential to make a substantial amount of money.
Unfortunately, while it's possible to earn generous returns by buying virtual currencies, the price of these coins can be extremely volatile so there's also a chance of sustaining major losses.
If you're thinking of adding cryptocurrency to your portfolio, there's a simple strategy you should consider to reduce the risk of outsized loss. Here's what it is.
Give this strategy a try when buying cryptocurrencies
If you are interested in buying cryptocurrencies and you want to choose the safest approach to purchasing these assets, a technique called dollar-cost averaging could be the right strategy.
Dollar-cost averaging is a method of buying assets that can be used for any type of investment, including buying virtual currencies. Essentially, when you use this method of buying assets, you'll commit to spending a set amount to purchase the same investment on a consistent schedule. For example, you could decide to invest $100 per month in Bitcoin every month on the 15th of the month.
Why dollar-cost averaging can work for you
Dollar-cost averaging is a widely used investment technique that can lessen the likelihood you'll experience big losses no matter what assets you are buying. But it can be especially valuable when you purchase an investment that's more volatile and has big swings in prices that can be hard to predict -- which is the case for cryptocurrency.
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The benefit of dollar-cost averaging is that it eliminates the need to try to time your purchase of a particular asset so you buy as much as possible when the price is down. Instead, by buying the asset consistently over time and spending the same amount on it each time, you increase the chances you'll make some of your investments when the price is low. This will offset other months when you may purchase at an inconvenient time when the cost has gone up. During times when the price is lower, you'll also acquire more of the asset for the same amount of money, which offsets circumstances where your buying power doesn't go as far.
Timing cryptocurrency moves is hard, if not impossible
It can be difficult, or even impossible, to predict when the price of a particular cryptocurrency will see a sudden decline or will rapidly increase. If you're trying to buy strategically at the exact right moment, chances are good you'll end up missing it. You could sit on the sidelines and wait for a long time, only to see the cost of the coins rise substantially which causes you to miss out on lots of potential gains. Or you could buy when the price is at its peak because you fear missing out when the price is trending high, and could then suffer immediate losses.
If you aren't trying to time your purchase perfectly, though, the chances of either of these scenarios occurring is less likely because you'll be purchasing based on your schedule rather than on trends you think you see. And even if you do happen to buy high at certain times, you're likely to also catch a price dip in other months.
If you're hoping to buy cryptocurrencies, you should seriously think about putting dollar-cost averaging to work -- especially since it's a simple and proven strategy that takes little effort to implement. It could just end up paying off for you in the end.
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