This post was originally published on this site.
Sometimes you are the biggest risk to your portfolio’s health.
When prices swing wildly, many crypto investors have a strong urge to push the sell button, and that isn’t too surprising. Bitcoin (BTC 1.44%) is currently priced at around $90,000 after hitting nearly $125,000 in early October, making for a drop of 20% in just three months. And if you own XRP (XRP 2.90%) or Ethereum (ETH 1.64%), the story is similar, and in fact slightly worse in terms of the downside in the same period.
In this environment, investors are faced with a very high risk of disaster stemming from their own inability to control their emotions and impulsivity. But there is one critical thing that people can do right now to mitigate the threat, so let’s investigate.
Image source: Getty Images.
Your feelings are a terrible risk manager
When a coin you own drops 20% or more in a short span, at best it feels like the market is personally insulting you. For many investors, a $1,000 loss hurts much more than a $1,000 gain feels good, and it’s hard to have the presence of mind (or the conviction) to buy the dip when there’s one to buy. At the same time, panic selling can ensure that you lock in losses when a bit of grit and some time would have erased them.
For instance, whereas a calm and patient investor might see Bitcoin’s recent drop as part of a normal market cycle, or as part of a reasonable correction after its sharp run-up over the prior three years, someone watching the price chart every hour is more likely to panic. When Bitcoin tumbles, Ethereum and XRP tend to be volatile, too, inviting the same reflex to sell, and potentially creating an internal narrative that a collapse is underway. In other words, if you make decisions based on your mood and the latest headlines, you will tend to buy when sentiment, excitement, and prices are highest and sell when fear peaks, which is precisely when it would actually be the most advantageous to buy.
Today’s Change
(-1.44%) $-1277.67
Current Price
$87683.00
Key Data Points
Market Cap
$1.8T
Day’s Range
$87627.00 – $89935.00
52wk Range
$74604.47 – $126079.89
Volume
37B
In case it wasn’t obvious, right now is one of those times when fear is widespread in the crypto sector. It’ll take a strong stomach to think about buying much of anything, not to mention a lot of conviction in your investment thesis for why you should own specific assets.
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In my experience, buying in difficult conditions is not something that gets much easier with practice. You’re not going to rewire your brain to enjoy seeing red in your portfolio. So the realistic move here is to put a simple and automated process between your emotions and your coins.
Today’s Change
(-2.90%) $-0.06
Current Price
$1.94
Key Data Points
Market Cap
$117B
Day’s Range
$1.94 – $2.01
52wk Range
$1.65 – $3.65
Volume
2.4B
Now’s the time to enable autopilot
The one thing in particular that can dramatically reduce your odds of doing something destructive with your Bitcoin, Ethereum, or XRP stash is committing today to an automated, rules-based plan that runs regardless of whether you are feeling brave or terrified.
This is exactly what dollar-cost averaging (DCA) is for. DCA is a simple strategy where you automatically invest the same amount of money into an asset on a regular schedule, regardless of its price. Most investing platforms as well as most crypto exchanges offer an easy way to do it.
By buying your high-conviction assets on both good days and bad days, your average purchase price ends up somewhere in the middle, and you avoid the impossible task of timing the market and picking the perfect moment to either buy or sell. Once you’ve accumulated a position and held it for a couple of years, you can evaluate whether there’s still any gas left in the tank for your investment thesis. If there isn’t, you can then choose to sell, but otherwise, you can just continue to buy more. Furthermore, when downturns hit, DCA means the same fixed dollar amount buys more units of the asset at lower prices, which can amplify gains if prices recover later.
Today’s Change
(-1.64%) $-50.56
Current Price
$3025.55
Key Data Points
Market Cap
$368B
Day’s Range
$3037.47 – $3171.02
52wk Range
$1398.62 – $4946.05
Volume
25B
As with any strategy, there are no guarantees that dollar-cost averaging will be the easy road to riches, but at least the market’s chaos will be working for you sometimes instead of only against you. If crypto ends up in a long, grinding bear market, a DCA plan will not save you. What it does do is strip out the most self-sabotaging behavior patterns like panic selling at the bottom and chasing euphoria at the top, which, in my experience, helps to prevent some serious losses.
So if you already hold Bitcoin or Ethereum or XRP, recognize that because you hold quality assets, many of the biggest risks stem from your investing behavior rather than from the assets themselves. Put an automatically executing plan in charge of your purchasing instead, and let the autopilot do the work. If you want or need to change course at some point, that door will always still be open to you.