Missed the Bitcoin Rally? Right here is an funding technique to take to the bull market whereas decreasing your threat
Bitcoin has come a long way since bottoming below $ 4,000 in March. The cryptocurrency hit a record high of over $ 19,900 early Tuesday and is up nearly 170% this year.
While institutional participation has increased, much of the retail volume may have stayed away from the market. This group may have developed the fear of missing out on the opportunity to make triple-digit profits (FOMO) over the past few weeks.
However, it can seem risky to invest now while the cryptocurrency is trading near lifetime highs as there is always the possibility of a significant price decline. Bitcoin saw multiple pullbacks of over 20% during the previous bull markets.
Investors who want to buy Bitcoin now should therefore consider implementing a DCA (dollar-cost averaging) strategy, according to leading traders in the cryptocurrency space.
"It's a great way to get exposure to both Bitcoin and other asset classes such as global equity indices, as both are expected to perform well over the next few years amid negative real interest rates," said Scott Weatherill, chief trader at over-the-counter liquidity provider B2C2 Japan said CoinDesk.
How averaging the dollar cost saves money
DCA, also known as the Constant Dollar Plan, involves buying smaller amounts of an asset on a regular basis, regardless of price fluctuations, rather than investing the entire amount at once. The strategy helps investors get the emotion out of their trades and can result in a lower average cost as the markets rarely move higher without retreating.
Read More: 5 Reasons Bitcoin Just Hit An All Time High Price
"Averaging the dollar cost of Bitcoin has historically been a very profitable strategy that lowers the risk of drawdown," said Weatherill.
By way of illustration, let's say an investor has accumulated $ 100 worth of bitcoin as of December 17, 2017 at the highest price observed on the 17th of each month, when the bitcoin high hit $ 19,783. At press time, this investor would own approximately 0.48 BTC at an average cost of approximately $ 8,660. This also means that at the current market price of $ 18,850, the investor would get a profit of almost 120%.
Bitcoin prices as of November 30, 2017 through December 1, 2020. If you bought at the top, you would have missed cheaper entry points in the months that followed.
However, if the investor made a lump sum investment on December 17, 2017 at the record price of $ 19,783, the investment would currently suffer a 4.7% loss. Over the long term, this loss could be more significant, adjusted for inflation.
Averaging the dollar cost in action
Source: Omkar Godbole
In the former case, the investor distributed $ 3,600 over 36 months and bought less bitcoin when prices were high and more when prices were low. This helped to reduce the average cost and make a significant profit. The strategy has had similar results in previous bull bear cycles.
"Ideally, you have to invest in the hope of selling at higher prices in the long term," said Chris Thomas, Product Manager at Swissquote Bank. "In my opinion, the best thing to do is to buy every month and build a position longer term."
The Risk of Certain Option Strategies for Retailers
Some investors might consider implementing synthetic strategies through the options market, such as buying a put option against a long position on the spot market. The put would gain in value in the event of a sell-off and mitigate the loss (on paper) in the long spot market position.
However, such strategies are more suitable for speculators who want to benefit from short-term price volatility and who want to violate the idea of lowering the average acquisition costs via DCA. "I wouldn't recommend buying puts while you're 'DCAing' as it would hurt returns," said Weatherill.
A put option is a derivative contract that gives the buyer the right, but not the obligation, to sell the underlying asset on or before a specified date at a specified price. A call option gives the right to buy.
An option buyer must prepay a premium while taking a long call / put position. A long put position makes money only if the asset is below the put's strike price on the expiry date. Otherwise the option expires worthless and results in a loss – in this case the premium paid – for the buyer.
Read More: Bitcoin Price Sets New Record High Of $ 19,850
Additionally, those trying to combine DCA with option hedging can damage their portfolio. For example, if an investor buys puts while DCAing and the market are rising, the options bought to hedge against a possible downturn would bleed money and hurt the total return from averaging the dollar cost.
"Private investors should stay away from options trading," warned Thomas. He added that a particular strategy, selling out-of-the-money calls, was extremely dangerous.
Savvy traders often generate additional income by selling call options well above the current spot price of Bitcoin and collecting rewards in the hopes that the market will not rise above the level at which the bullish bet is selling becomes. However, with short call positions, holders can theoretically suffer unlimited losses as the sky is the limit for any asset.
In the case of Bitcoin, this is particularly risky as sentiment remains optimistic. Analysts expect a sustained upward trend due to increased institutional demand. Therefore, selling call options during DCAing could prove costly.
"While there is a temptation to optimize through various trading strategies, the new money should stick to certain strategies: 1) stay long and 2) buy dips," said Jehan Chu, co-founder and managing partner at Hong Kong blockchain investment and trading firm Kenetic Capital.