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LearnAcademyInvestment fundamentals: Strategies in practiceLesson 3: An Introduction to Cost Averaging

Lesson 3: An Introduction to Cost Averaging

After completing this lesson, you will be able to:
Understand how to implement cost averaging.
Understand when cost averaging is an appropriate investment strategy.
Know why cost averaging is a good fit for new or part-time investors.
Know why cost averaging is particularly important in the crypto world.
Explain what a cost basis is.

Welcome to the third lesson in Kriptomat’s guide to fundamental investment strategies. This lesson is about cost averaging.

Cost averaging has been a recommended investment strategy since long before cryptocurrencies were invented.

  • It doesn’t require a large amount of cash to get started.
  • It is particularly useful in meeting long-term financial goals like buying a house or maintaining a comfortable lifestyle in retirement.
  • No less an authority than billionaire Warren Buffett recommends cost averaging as the best strategy for virtually all investors.

Often called dollar cost averaging in the United States, cost averaging is a simple strategy in which a consistent amount of money is invested every week or month buying the same asset.

  • For example, you might purchase 30 euros’ worth of gold each week or 200 euros’ worth of European treasury bond exchange-traded funds (ETFs) every month.
  • One of the benefits of cost averaging is that scheduled small purchases may be easy to fit into your existing budget without making painful cuts to start investing.
  • The purchased assets accumulate in your account regularly. Meanwhile, they rise and fall in value according to market rates.

Starting small doesn’t mean that your portfolio remains small

  • You can start your cost-averaging investment on a shoestring.
  • Over time, investing the price of a pizza each week can fuel a comfortable retirement plan.
  • Cost averaging multiplies the profits that come when the market rises.

Cost averaging is especially useful in crypto investing because it smooths out the highs and lows in crypto price fluctuations.

  • It also means you don’t have to monitor crypto prices compulsively to buy when prices are low and sell when prices are high. With cost averaging, you automatically buy more when prices are low.
  • It ensures you have some crypto in your portfolio to benefit when the market rebounds.
  • And it turns market downturns into potential profit opportunities.

Cost averaging sets the stage for earning money during bear markets

  • With cost averaging, the same amount of money gives you more assets when the price is low. That reduces the average amount you paid per unit.
  • The “amount you paid per unit” is known as the cost basis. It’s simply the average price you paid for a share of stock or a crypto token.
  • The lower your cost basis, the higher your profit when the market recovers and you sell the assets.

Let’s look at a quick example

  • Let’s say you used Kriptomat Recurring Buy to invest 25 euros per week into Bitcoin starting five years ago.
  • That’s a five-year investment of 6,525 euros.
  • But because of the dynamics of cost averaging, your portfolio would be worth 26,241 euros. That’s a return-on-investment of 302.16%.

Cost averaging is an especially good strategy for new or part-time investors

  • It frees you from the worry and hassle of monitoring crypto prices and identifying highs and lows.
  • You can get started without a big investment fund.
  • You can add, reduce, or discontinue cost-averaging purchases at any time.
  • At Kriptomat, the whole process is automated by the Recurring Buy feature. The cryptos you specify are purchased automatically once a month, twice a month, or weekly.

So – what did we learn?

  • Cost averaging is a way of minimizing the effects of volatile crypto prices.
  • Over the long term, a schedule of small cost-averaging purchases can help investors achieve major financial goals.
  • Cost averaging can reduce your cost basis – the average amount you have paid per coin or token in your portfolio. This leads to higher profits when you eventually sell your crypto.

That’s the end of this lesson! Test your understanding and earn points toward a Kriptomat Academy certificate of achievement by taking the test!

How do you implement cost averaging?

Visit three or four crypto exchanges and make your purchase at the average price.
Turn over your crypto portfolio to a qualified fund manager at a company like Berkshire Hathaway.
Buy three or more cryptocurrencies so your weekly winners and losers will average out.
Purchase the same amount of the same cryptocurrency according to a regular schedule.

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When is cost averaging an appropriate investment strategy?

Anytime – especially during market downturns.
Anytime – especially when the market is setting new highs.
When you are trying to offset losses from a major one-time investment.
Only when the dollar’s cost is within a few percentage points of the weekly rolling average.

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Why is cost averaging a good fit for new or part-time investors?

Because it guarantees a reliable small yield on every investment.
Because it relieves the investor of the need to monitor the market, predict highs and lows, and time transactions accordingly.
Because profits earned with cost averaging have a low basis and are therefore not subject to income tax in most jurisdictions.
Because cost averaging gives you a high cost basis, which means you own a higher percentage share of the crypto in your portfolio.

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Why is cost averaging an especially good investment strategy in the crypto world?

You can sell your crypto below the average cost.
Investment advisors and bankers don’t take a share of your profits.
It works with NFTs as well as traditional cryptocurrencies.
It helps minimize the bad effects of crypto price volatility.

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Which financial goal is NOT an ideal candidate for cost averaging?

Purchasing a home or other real estate.
Paying for children’s university educations.
Paying off loans, credit card balances, and other debts.
Accumulating a nest egg for a comfortable retirement.

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Kriptomat Academy content is informative in nature and should not be considered a personalised or any other investment recommendations or advice.
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