Bitcoin has come a long way since experiencing a $ 4,000 price floor in March. The king of digital currencies crossed the $ 19,900 mark on Tuesday, December 2nd, and its price growth reached 170% this year.
According to Kevin Desk, while the participation of investment institutions and large-scale investors in bitcoin trading has increased dramatically, a large proportion of small-scale investors may have remained out of the bull market. It is unlikely that this group of people have experienced a “fear of falling behind” (FOMO) in the triple digits in recent weeks.
However, now that Bitcoin is trading in the vicinity of its highest price record, investing in it seems risky; Because there is always the possibility of a sharp return of prices. Bitcoin has repeatedly experienced a 20% price correction in its previous uptrend.
Therefore, according to the biggest digital currency traders, investors who want to buy bitcoin should now look for a Dollar-cost Averaging or DCA strategy. Scott Weatherill, senior broker at Japanese liquidation firm B2C2, said:
Dollar cost averaging is a good way to invest in bitcoin and other types of assets; Because in both cases, this method seems to perform well against the real negative rate of the coming years.
Dollar cost averaging is a way to save money
DCA, also known as fixed dollar investment, offers a less risky solution instead of investing the entire amount at one time; Buy smaller amounts of assets at regular intervals, regardless of price fluctuations. This strategy helps investors eliminate emotions from their decisions and trades and reduce their average purchase cost; Because markets will often experience setbacks as they grow.
“Drill further stated:
Averaging the dollar cost of buying Bitcoin has always been a lucrative strategy throughout history; Because it minimizes the risk of falling from lower prices.
Let us explain the problem with an example; Suppose an investor, right at the peak of the Bitcoin price on December 17, 2017, started buying Bitcoin at $ 19,783 and bought $ 100 on the 17th of each month. At the time of writing, this investor owns 0.48 bitcoins with an average purchase price of $ 8,660. In other words, considering the current price of Bitcoin ($ 18,850), this investor will earn 120% profit.
Now, if we assume that the same investor had converted all his capital into Bitcoin at the price of $ 19,783 on December 17, 2017, he would now experience a loss of 4.7 percent. If we take into account the impact of inflation over this long period of time, this loss will be much greater.
In the previous case, the investor converted $ 3,600 to Bitcoin in 36 months; He made more purchases when the price of bitcoin was low and less when the price was high. This strategy helped him reduce his average purchase cost and make a significant profit. This strategy has also recorded similar results in previous uptrends.
Chris Thomas, Product Development Manager at Swissquote Bank, says:
Ideally, you should invest in higher prices in the hope of long-term sales. In my opinion, the best way is to buy monthly and create opportunities in the long run.
Risk of options trading strategies for small traders
Some investors may be thinking of implementing hybrid strategies through the option market. One of these strategies is to use a put option instead of a long position in instant markets. The advantage of a put option contract is that it minimizes the loss (on paper) of long positions in the normal market when the whales are selling in bulk.
However, these strategies are more suitable for people who want to take advantage of short-term Bitcoin fluctuations and oppose the idea of reducing the average cost of buying through DCA. Vadril warns:
If you are implementing the DCA strategy, I do not recommend buying option contracts. Because it reduces your profits.
A put option contract is a type of derivative market contract that gives the buyer the right (this right is not required) to sell the asset before the due date, at a predetermined price. A call option contract is also a contract that gives the trader the right to purchase an asset at a predetermined price before maturity.
The buyer of the option contract is obliged to pay the guarantee (Premium) before entering the buy / sell position. A long-term options contract is only profitable if the price of that asset on the due date is lower than the pre-agreed price. Otherwise the buyer will not sell at the agreed price and the contract will expire without any special value. In this case, the buyer of the contract has suffered a loss equal to the amount guaranteed by the contract.
In addition, individuals trying to combine the DCA strategy with option contracts may underperform their investment portfolio. For example, if an investor using the DCA method has spent part of its capital on buying a put option contract and the price of bitcoin rises in the meantime, a contract that was bought to cover the risk of a possible fall in the price of bitcoin is now worthless. Will be considered and will waste part of the money. The investor could spend the same money on averaging dollar costs and ultimately make more profit.
Chris Thomas says:
Micro-investors should avoid option contracts. A specific strategy, that is, the sale of option contracts, can be very dangerous.
Professional traders often seek to make more money by selling Bitcoin option contracts at a much higher price than the current price of Bitcoin in the spot market and collecting warranty fees. They often hope that the price of bitcoin in the market will remain below the contract price. Theoretically, however, there is an unlimited potential for short-term buy-in positions; Because there is no limit to the price of assets.
This is obviously still dangerous for Bitcoin; Analysts believe that the recent uptrend will continue due to the continuing organizational demand for bitcoin. Therefore, selling option contracts along with using DCA method will be very risky and costly.
Jehan Chu, co-founder and managing partner at Kenetic Capital, a Hong Kong-based blockchain company, believes:
Although there is always the temptation to increase profits through a combination of trading strategies, it is now best to rely on reliable strategies; First: invest long-term; Second: Do not miss the drop in prices.