With bitcoin surging through $15 000 in the last week, many investors are wondering whether it is too late to jump on board.
Those who bought in late 2017 at prices close to $20 000 are still roughly 27% in the red, and had to sit through a collapse in price of 84% before bitcoin commenced its climb back up to current prices.
This kind of volatility has spooked many investors away from bitcoin.
Rand cost averaging is a way to accumulate bitcoin over time by making regular purchases, either weekly or monthly.
It has the advantage of reducing the risks associated with severe price fluctuations.
Had you done this since January 2018, the overall return would have been 48% – despite the 84% drop in price between December 2017 and November 2018.
The chart below shows the bitcoin price since December 2017. After peaking at close to $20 000 in December 2017, the price fell to about $3 200 by late 2018.
Investing an amount of R100 a month would have been a losing cause until the price rebounded to $11 000 by late 2019. Thereafter, new investments added to the profitability of the strategy.
‘Buy low and sell high’ is a tried-and-tested strategy for traders, but this involves trying to time the market – an inherently risky strategy. Very few traders get it consistently right. Given bitcoin’s volatility, this strategy could backfire.
The next chart shows what would have happened with rand cost averaging at the rate of R100 a month since November 2017. The total capital invested over the three-year period was R3 600, which had grown to a net capital value of R5 341.
Rand cost averaging has its drawbacks: for example, an opportunity to buy when prices drop dramatically. Bitcoin has a tendency to reverse direction after a sharp move either up or down. Traders will pick up these opportunities. Rand cost averaging will tend to miss these moves.
The big advantage of rand cost averaging is that it is a way for those new to bitcoin to make a start without having to time the market. Another advantage of this strategy is that it does not require any technical understanding of bitcoin, nor having to follow the constant flow of news that might move the price.