Guide to Cryptocurrency Auto-Investment
Auto-investment is a passive investment strategy that involves regularly purchasing fixed investment assets with the same amount of funds to achieve an average cost and mitigate price fluctuations and risks.
Foreword
In modern society, investment and financial management have become increasingly popular. However, for many people, investment and financial management can be unfamiliar and overwhelming. The timing aspect, specifically when to buy and sell, has always been a dilemma for traders and investors, especially in highly volatile crypto markets. Without a good strategy, investors are more susceptible to losses in these fluctuating markets.
To address this challenge, traders may choose from many investment strategies to navigate the complexities of identifying buying and selling opportunities. One such strategy is auto-investment, which involves regularly purchasing a predetermined portfolio of assets with a fixed amount of money, enabling passive investment management.
This course will delve deeper into the auto-investment strategy and provides a comprehensive introduction to its basic concepts and principles, covering relevant terminology, and operational principles, as well as an analysis of its advantages and disadvantages. It aims to help you better understand and apply the auto-investment strategy. Through this course, you are expected to gain a holistic view of auto-investment, laying a solid foundation for your future investment and financial management endeavors.
What is auto-investment?
Auto-investment is an investment strategy that involves regularly purchasing a specific investment asset at fixed intervals with the same amount of funds, aiming to mitigate price fluctuations and risks by buying in batches. As the number of auto-investments increases, the cost of your holdings is averaged. This strategy is also known as Dollar Cost Averaging, or DCA for short.
Investors who adopt this strategy tend to reduce their purchase quantities when the investment asset price rises to avoid getting caught in high positions. Conversely, they increase their purchase quantities when the price declines, lowering the overall cost basis and allowing for potential profits when the price rebounds. Auto-investment strategy effectively averages the investment cost, reduces the risk of getting trapped, and increases the probability of entering the market at advantageous levels.
Simply put, auto-investment is a passive investment strategy. Compared with the active investment strategy, it has the advantages of being easy to use, possessing relatively lower risk, and enjoying stable long-term yield performance. Users do not need to closely monitor price movements but only need to execute the investment plan accordingly, making it particularly suitable for novice investors.
Different forms of auto-investment strategy
Dollar Cost Averaging (DCA)
DCA is the prototype of a classic auto-investment strategy, determined by two variables: investment frequency and single investment amount. The investment frequency determines the number of purchases made during the investment period, while the single investment amount will affect the cost basis of opening a position using the auto-investment strategy. Regardless of whether asset prices rise or fall, the approach of this strategy is to buy and HODL according to the predetermined schedule. In the long-term period, the purchase price will approximate the average market price of the investment asset over the investment period.
As shown in the following table, a monthly DCA of 10 USDT is used to purchase coin B. When the price rises, the quantity purchased decreases, and when it falls, the quantity purchased increases. Although investors will suffer losses when the price falls, they will get higher returns when the price rises because of the increased positions.
点击图片可查看完整电子表格
Value Averaging
Value averaging is another investment strategy similar to auto-investment. Unlike DCA, its purchase amount is adjusted based on the rise and fall of the price of the underlying asset. The approach of this strategy involves setting a target investment amount for each period and, after a fixed time period, adjusting the current period’s investment amount based on the difference between the previous period’s asset price and the target amount, aiming to achieve the goal of evenly distributing investments.
When the price of the underlying asset falls, the investment amount increases, while it decreases when the price rises. This strategy requires investors to carefully calculate the adjusted investment amount before each investment period to avoid excessively buying unnecessary positions.
For example, let’s say you set a goal of increasing your BTC investment position by 100 USDT each month. If the price of Bitcoin surged last month, resulting in a 50 USDT increase in the value of your Bitcoin holdings, you would only need to purchase an additional 50 USDT worth of Bitcoin to achieve the monthly goal of increasing your BTC position by 100 USDT. Conversely, if Bitcoin experiences a significant drop in the next month, causing a 50 USDT decrease in the value of your Bitcoin holdings, you would need to invest 150 USDT to compensate for the decrease and meet the monthly goal of increasing your BTC position by 100 USDT.
Rolling Investing
Rolling investing s a strategy that makes regular and auto-investments based on asset price volatility. It is a more flexible approach compared to value averaging, as it allows for adding investments during both price declines and price increases. This strategy typically requires investors to closely monitor market conditions in order to capitalize on trend formations and market waves.
Specifically, if the token price falls, the investment amount can be reduced to reduce the potential risks. For instance, if the initial investment amount is $100 and the token price drops by 10% in the next investment period, the investment amount would be proportionally reduced to $90. If the price continues to decline, the investment amount can be further lowered, allowing for cost averaging while avoiding overweight positions.
Conversely, if the token price increases to $110 and shows further upward momentum, the next investment amount can be proportionally increased to $110 as well. By utilizing rolling investing, investors aim to capture larger gains during trending market conditions.
Coin-based Auto-investment
Coin-based auto-investment is an inverse DCA strategy that uses one cryptocurrency (such as Bitcoin) to buy another cryptocurrency (such as ETH or USDT). Investors sell a fixed amount of crypto assets for other currencies at regular intervals, for example, on a monthly or quarterly basis.
Let’s consider a Bitcoin miner who receives a fixed income in BTC and wants to capitalize on the price appreciation of ETH. He can use 0.01 BTC to buy ETH every week to build a coin-based auto-investment strategy. Regardless of whether the Bitcoin price rises or falls, he consistently uses the same amount of Bitcoin to buy other cryptocurrencies.
By regularly selling Bitcoin for positions in other cryptocurrencies, investors can get a better average buy price when the price of other currencies falls. They can then sell these holdings when the prices of other cryptocurrencies rise, aiming to gain more Bitcoin-based returns.
Auto-investment principles
Auto-investment is often perceived as a passive investment approach, but it is not a guaranteed strategy for success. Its role is only to reduce the entry barrier and mitigate investment risks. The actual key to profitability lies in selecting promising investment targets.
A continuously declining asset will only result in continuously lowering your average cost without being able to break even. Only high-quality assets with sustained growth are worth long-term holding. By adopting a passive auto-investment strategy, you can benefit from the time advantage.
With a sufficient number of investment periods, traders can demonstrate that the cost line of an auto-investment strategy will approach the moving average of the underlying asset’s price. For example, if you consistently invest in a certain cryptocurrency for 30 consecutive days, the average cost of your positions will approximate the 30-day moving average of that cryptocurrency’s price.
When the market price of the underlying asset is above the moving average, it means that your auto-investment strategy is profitable. At this point, you can consider whether to continue to place your investment or choose to take profits. Conversely, if the market price of the underlying asset is below the moving average, it indicates that your current holdings are in a loss position, and you’d better continue with your auto-investment strategy until the market reversal occurs.
As the moving average is the DCA cost line to some extent, it can serve as a reference indicator for executing or terminating the strategy.
When to start auto-investment?
The auto-investment strategy does not require precise timing of entry. For high-quality assets with long-term price rises, any moment can be a buying opportunity. Therefore, the importance lies more in identifying blue-chip assets in the market rather than timing the entry point for an auto-investment strategy. However, the performance of an auto-investment strategy ultimately depends on the cost incurred. By combining fundamental analysis and technical analysis to identify relatively low price points, one can enhance the profitability of the strategy.
On the other hand, when examining the price history of the cryptocurrency market, it is evident that the prices of most mainstream cryptocurrencies are highly correlated with Bitcoin. Bitcoin has undergone three halving events, occurring approximately every four years, with the price reaching a relatively high point around a year after each halving and a relatively low point in the year before the next halving. Leveraging the cyclic nature of the cryptocurrency market, investors can better carry out long-term auto-investment strategies.
Advantages and disadvantages of the auto-investment strategy
Advantages of auto-investment strategy:
- Smooth market fluctuations
Auto-investment allows investors to enter the market in different periods, avoiding the risk of investing a lump sum during unfavorable market conditions. It also helps to smooth out investment costs in different market conditions.
- Risk diversification
A single large investment may result in buying at a high price or experiencing market corrections. But by investing in smaller increments over time, the impact of the timing of entry on the average cost of holdings is reduced, helping to avoid significant losses from a single investment.
- Simple and easy to execute the strategy
The auto-investment strategy allows investors to make investment plans beforehand, avoiding ad hoc funding gaps. With no complex timing of entry and exit, this strategy helps even inexperienced investors to easily get started.
- Develop good investment habits
Auto-investment requires long-term continuous investment, which helps investors to develop good investment habits and understand market dynamics, thereby improving their investment skills.
Disadvantages of auto-investment:
- Only applicable to blue-chip assets
Auto-investment does not completely eliminate potential market risks, such as market downturns or underperformance of assets. Investors using this strategy need to passively wait for the market to turn around. Therefore, it is necessary to carefully select the investment assets.
- Opportunity Cost
Since funds are committed to auto-investment products, there is a possibility of missing out on other investment opportunities in the market. This could result in opportunity costs, as the lower turnover of funds may impact the effectiveness of financial performance.
- Long-term dulling effect
The long-term dulling effect means that when the number of auto-investments increases, the risk diversification effect of the auto-investment strategy will gradually decrease. This happens because the proportion of funds allocated to each purchase relative to the total investment amount gradually decreases, making it impossible to effectively diversify risks.
Conclusion
In this lesson, we have learned the fundamental concepts of auto-investment, which involves purchasing investments in batches to achieve an average cost and mitigate price fluctuations and risks. Auto-investment is a passive investment strategy, which is also one of the tools widely used in traditional finance and favored by many investment institutions and professional fund managers. By consistently buying and holding blue-chip assets over the long term, investors can achieve satisfactory returns.
In addition to the commonly used dollar-cost averaging method, auto-investment can take various other forms, including value averaging and rolling investing. It is an easy-to-implement approach with relatively low risk, offering stable, long-term yields and helping users develop good investment habits. In the next lesson, we will guide you step by step to learn how to make auto-investments on the Gate.io platform, facilitating you to develop a deeper understanding of auto-investment both in theory and practice.
Takeaways
Auto-investment is a passive investment strategy that involves regularly purchasing fixed investment assets with the same amount of funds to achieve an average cost and mitigate price fluctuations and risks.
Auto-investment is characterized by being easy to use, relatively low risks, and stable and long-term returns, making it suitable for novice investors.
The auto-investment strategy can take different forms, including dollar cost averaging (DCA), value averaging, rolling investing, etc.
The advantages of auto-investment include averaging investment cost, risk diversification, being easy to use, and facilitating users to develop good investment habits.
The downsides of auto-investment include the potential to miss out on quick profit opportunities, limited applicability to blue-chip assets, and the problem of long-term dulling effect.
Main Video
Related Articles
Guide to Cryptocurrency Auto-Investment
Auto-investment is a passive investment strategy that involves regularly purchasing fixed investment assets with the same amount of funds to achieve an average cost and mitigate price fluctuations and risks.
Foreword
In modern society, investment and financial management have become increasingly popular. However, for many people, investment and financial management can be unfamiliar and overwhelming. The timing aspect, specifically when to buy and sell, has always been a dilemma for traders and investors, especially in highly volatile crypto markets. Without a good strategy, investors are more susceptible to losses in these fluctuating markets.
To address this challenge, traders may choose from many investment strategies to navigate the complexities of identifying buying and selling opportunities. One such strategy is auto-investment, which involves regularly purchasing a predetermined portfolio of assets with a fixed amount of money, enabling passive investment management.
This course will delve deeper into the auto-investment strategy and provides a comprehensive introduction to its basic concepts and principles, covering relevant terminology, and operational principles, as well as an analysis of its advantages and disadvantages. It aims to help you better understand and apply the auto-investment strategy. Through this course, you are expected to gain a holistic view of auto-investment, laying a solid foundation for your future investment and financial management endeavors.
What is auto-investment?
Auto-investment is an investment strategy that involves regularly purchasing a specific investment asset at fixed intervals with the same amount of funds, aiming to mitigate price fluctuations and risks by buying in batches. As the number of auto-investments increases, the cost of your holdings is averaged. This strategy is also known as Dollar Cost Averaging, or DCA for short.
Investors who adopt this strategy tend to reduce their purchase quantities when the investment asset price rises to avoid getting caught in high positions. Conversely, they increase their purchase quantities when the price declines, lowering the overall cost basis and allowing for potential profits when the price rebounds. Auto-investment strategy effectively averages the investment cost, reduces the risk of getting trapped, and increases the probability of entering the market at advantageous levels.
Simply put, auto-investment is a passive investment strategy. Compared with the active investment strategy, it has the advantages of being easy to use, possessing relatively lower risk, and enjoying stable long-term yield performance. Users do not need to closely monitor price movements but only need to execute the investment plan accordingly, making it particularly suitable for novice investors.
Different forms of auto-investment strategy
Dollar Cost Averaging (DCA)
DCA is the prototype of a classic auto-investment strategy, determined by two variables: investment frequency and single investment amount. The investment frequency determines the number of purchases made during the investment period, while the single investment amount will affect the cost basis of opening a position using the auto-investment strategy. Regardless of whether asset prices rise or fall, the approach of this strategy is to buy and HODL according to the predetermined schedule. In the long-term period, the purchase price will approximate the average market price of the investment asset over the investment period.
As shown in the following table, a monthly DCA of 10 USDT is used to purchase coin B. When the price rises, the quantity purchased decreases, and when it falls, the quantity purchased increases. Although investors will suffer losses when the price falls, they will get higher returns when the price rises because of the increased positions.
点击图片可查看完整电子表格
Value Averaging
Value averaging is another investment strategy similar to auto-investment. Unlike DCA, its purchase amount is adjusted based on the rise and fall of the price of the underlying asset. The approach of this strategy involves setting a target investment amount for each period and, after a fixed time period, adjusting the current period’s investment amount based on the difference between the previous period’s asset price and the target amount, aiming to achieve the goal of evenly distributing investments.
When the price of the underlying asset falls, the investment amount increases, while it decreases when the price rises. This strategy requires investors to carefully calculate the adjusted investment amount before each investment period to avoid excessively buying unnecessary positions.
For example, let’s say you set a goal of increasing your BTC investment position by 100 USDT each month. If the price of Bitcoin surged last month, resulting in a 50 USDT increase in the value of your Bitcoin holdings, you would only need to purchase an additional 50 USDT worth of Bitcoin to achieve the monthly goal of increasing your BTC position by 100 USDT. Conversely, if Bitcoin experiences a significant drop in the next month, causing a 50 USDT decrease in the value of your Bitcoin holdings, you would need to invest 150 USDT to compensate for the decrease and meet the monthly goal of increasing your BTC position by 100 USDT.
Rolling Investing
Rolling investing s a strategy that makes regular and auto-investments based on asset price volatility. It is a more flexible approach compared to value averaging, as it allows for adding investments during both price declines and price increases. This strategy typically requires investors to closely monitor market conditions in order to capitalize on trend formations and market waves.
Specifically, if the token price falls, the investment amount can be reduced to reduce the potential risks. For instance, if the initial investment amount is $100 and the token price drops by 10% in the next investment period, the investment amount would be proportionally reduced to $90. If the price continues to decline, the investment amount can be further lowered, allowing for cost averaging while avoiding overweight positions.
Conversely, if the token price increases to $110 and shows further upward momentum, the next investment amount can be proportionally increased to $110 as well. By utilizing rolling investing, investors aim to capture larger gains during trending market conditions.
Coin-based Auto-investment
Coin-based auto-investment is an inverse DCA strategy that uses one cryptocurrency (such as Bitcoin) to buy another cryptocurrency (such as ETH or USDT). Investors sell a fixed amount of crypto assets for other currencies at regular intervals, for example, on a monthly or quarterly basis.
Let’s consider a Bitcoin miner who receives a fixed income in BTC and wants to capitalize on the price appreciation of ETH. He can use 0.01 BTC to buy ETH every week to build a coin-based auto-investment strategy. Regardless of whether the Bitcoin price rises or falls, he consistently uses the same amount of Bitcoin to buy other cryptocurrencies.
By regularly selling Bitcoin for positions in other cryptocurrencies, investors can get a better average buy price when the price of other currencies falls. They can then sell these holdings when the prices of other cryptocurrencies rise, aiming to gain more Bitcoin-based returns.
Auto-investment principles
Auto-investment is often perceived as a passive investment approach, but it is not a guaranteed strategy for success. Its role is only to reduce the entry barrier and mitigate investment risks. The actual key to profitability lies in selecting promising investment targets.
A continuously declining asset will only result in continuously lowering your average cost without being able to break even. Only high-quality assets with sustained growth are worth long-term holding. By adopting a passive auto-investment strategy, you can benefit from the time advantage.
With a sufficient number of investment periods, traders can demonstrate that the cost line of an auto-investment strategy will approach the moving average of the underlying asset’s price. For example, if you consistently invest in a certain cryptocurrency for 30 consecutive days, the average cost of your positions will approximate the 30-day moving average of that cryptocurrency’s price.
When the market price of the underlying asset is above the moving average, it means that your auto-investment strategy is profitable. At this point, you can consider whether to continue to place your investment or choose to take profits. Conversely, if the market price of the underlying asset is below the moving average, it indicates that your current holdings are in a loss position, and you’d better continue with your auto-investment strategy until the market reversal occurs.
As the moving average is the DCA cost line to some extent, it can serve as a reference indicator for executing or terminating the strategy.
When to start auto-investment?
The auto-investment strategy does not require precise timing of entry. For high-quality assets with long-term price rises, any moment can be a buying opportunity. Therefore, the importance lies more in identifying blue-chip assets in the market rather than timing the entry point for an auto-investment strategy. However, the performance of an auto-investment strategy ultimately depends on the cost incurred. By combining fundamental analysis and technical analysis to identify relatively low price points, one can enhance the profitability of the strategy.
On the other hand, when examining the price history of the cryptocurrency market, it is evident that the prices of most mainstream cryptocurrencies are highly correlated with Bitcoin. Bitcoin has undergone three halving events, occurring approximately every four years, with the price reaching a relatively high point around a year after each halving and a relatively low point in the year before the next halving. Leveraging the cyclic nature of the cryptocurrency market, investors can better carry out long-term auto-investment strategies.
Advantages and disadvantages of the auto-investment strategy
Advantages of auto-investment strategy:
- Smooth market fluctuations
Auto-investment allows investors to enter the market in different periods, avoiding the risk of investing a lump sum during unfavorable market conditions. It also helps to smooth out investment costs in different market conditions.
- Risk diversification
A single large investment may result in buying at a high price or experiencing market corrections. But by investing in smaller increments over time, the impact of the timing of entry on the average cost of holdings is reduced, helping to avoid significant losses from a single investment.
- Simple and easy to execute the strategy
The auto-investment strategy allows investors to make investment plans beforehand, avoiding ad hoc funding gaps. With no complex timing of entry and exit, this strategy helps even inexperienced investors to easily get started.
- Develop good investment habits
Auto-investment requires long-term continuous investment, which helps investors to develop good investment habits and understand market dynamics, thereby improving their investment skills.
Disadvantages of auto-investment:
- Only applicable to blue-chip assets
Auto-investment does not completely eliminate potential market risks, such as market downturns or underperformance of assets. Investors using this strategy need to passively wait for the market to turn around. Therefore, it is necessary to carefully select the investment assets.
- Opportunity Cost
Since funds are committed to auto-investment products, there is a possibility of missing out on other investment opportunities in the market. This could result in opportunity costs, as the lower turnover of funds may impact the effectiveness of financial performance.
- Long-term dulling effect
The long-term dulling effect means that when the number of auto-investments increases, the risk diversification effect of the auto-investment strategy will gradually decrease. This happens because the proportion of funds allocated to each purchase relative to the total investment amount gradually decreases, making it impossible to effectively diversify risks.
Conclusion
In this lesson, we have learned the fundamental concepts of auto-investment, which involves purchasing investments in batches to achieve an average cost and mitigate price fluctuations and risks. Auto-investment is a passive investment strategy, which is also one of the tools widely used in traditional finance and favored by many investment institutions and professional fund managers. By consistently buying and holding blue-chip assets over the long term, investors can achieve satisfactory returns.
In addition to the commonly used dollar-cost averaging method, auto-investment can take various other forms, including value averaging and rolling investing. It is an easy-to-implement approach with relatively low risk, offering stable, long-term yields and helping users develop good investment habits. In the next lesson, we will guide you step by step to learn how to make auto-investments on the Gate.io platform, facilitating you to develop a deeper understanding of auto-investment both in theory and practice.
Takeaways
Auto-investment is a passive investment strategy that involves regularly purchasing fixed investment assets with the same amount of funds to achieve an average cost and mitigate price fluctuations and risks.
Auto-investment is characterized by being easy to use, relatively low risks, and stable and long-term returns, making it suitable for novice investors.
The auto-investment strategy can take different forms, including dollar cost averaging (DCA), value averaging, rolling investing, etc.
The advantages of auto-investment include averaging investment cost, risk diversification, being easy to use, and facilitating users to develop good investment habits.
The downsides of auto-investment include the potential to miss out on quick profit opportunities, limited applicability to blue-chip assets, and the problem of long-term dulling effect.
Main Video
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