As cryptos shoot for the stars, consider rand cost averaging

Written by Ciaran Ryan. Posted in Journalism

Investing a regular amount in crypto each month is a proven way to grow your account over time. From Moneyweb.

The main advantage of rand cost averaging is that you don’t have to worry about trying to time the market. Image: Chris Ratcliffe, Bloomberg

The main advantage of rand cost averaging is that you don’t have to worry about trying to time the market. Image: Chris Ratcliffe, Bloomberg

This may be a frightening time for anyone considering getting involved in cryptos for the first time. Bitcoin appears headed for $60 000 (R887 000) after cracking $20 000 (R295 668) two months ago. It’s up 185% in just eight weeks.

Ethereum broke $600 just two months ago and is now headed for $2 000 – a gain of 230% in two months.

Cardano is up nearly 500% in the last two months.

These gains are so dizzying that many fear they have missed the boat, though these same fears were expressed in prior years when bitcoin first broke R10 000, then R100 000, and then R300 000.

Each time bitcoin has broken its previous high.

“Many people fear crypto prices have shot [up] so high that it is too late to enter the market, but we should remember that there have been price surges like this in the past. Instead of trying to enter at a favourable price, investing a bit every month is a proven way participate in the rise in cryptocurrencies like bitcoin,” says Farzam Ehsani, CEO of crypto exchange VALR.

Moneyweb previously reported on the advantages of rand cost averaging in November 2020, but that article certainly needs updating in light of recent price moves.

Had you invested $100 a month over the last three years, your total capital invested to date would be $3 700 (R54 000 at an average ZAR/USD exchange rate of R14.60).

That $3 700 invested would have grown to an astonishing $25 000 (R365 000) over three years.

Take a look at the following graph from Dollar Cost Averaging Bitcoin (dcabtc.com). Dollar (or rand) cost averaging is where you invest a regular amount of money in an asset, usually monthly or weekly.

Investing $100 a month for three years would have grown your bitcoin holdings to $25 000, a 575% growth on the capital invested. By way of comparison, the same amount invested in the Dow Jones Industrial Index (the red line in the graph below) would have returned $4 460 over the same period, while gold would have returned $4 488.

Source: dcabtc.com

The rand cost averaging strategy is advisable for investors who are looking to buy bitcoin for the long term, since it protects them from potentially allocating all their capital at a price peak.

It is possible to tweak this strategy by using charts to time your investment, particularly when bitcoin looks oversold on a relative strength index (RSI). The chart below shows the RSI (in purple) against the USD bitcoin price. Prices are generally considered “overbought” when the RSI is above 70 and “oversold” below 30. As can be seen from the chart below, bitcoin’s RSI hasn’t been near 30 in months due to the strength of the bull market, so an RSI of 40-50 would have substituted for a good entry point.

Source: Cryptopurview

For those with little technical knowledge of markets, however, it is better to avoid trying to time the market.

Sean Sanders, CEO of crypto investment platform Revix, says rand cost averaging has become a favoured method for retail investors looking to capitalise on the phenomenal growth in crypto assets prices in recent months.

“It’s a relatively safe way to invest, and you don’t get too hung up on the volatility in crypto prices. When prices drop, you get an opportunity to buy in at a lower price, but we haven’t seen much of that opportunity in the last few months. Since November last year, the prices have been headed one way, and that’s up.”

The main advantage of rand cost averaging, if done at regular intervals such as the end of each month, is that it avoids having to time the market. The less attention paid to price under this strategy, the better.

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.