Crypto Value Averaging Strategy 2.0
I first started investing in crypto around August 2017. I had just started stopsaving.com and an old friend from high school emailed me to ask what I thought about crypto. Back then, I thought it was a scam – like most people with a traditional finance background did at the time!
Much has changed since then. I’ve since written two books on crypto, helped manage a crypto hedge fund, and now spend most of my spare time immersed in the crypto space. Throughout this digital journey, I’ve used many trading and investment strategies. Some have worked very well, others not so much.
With that being said, there is one particular investment strategy I still use when certain market conditions call for it – value averaging. I first started using value averaging for crypto in September 2017. At the time, I felt this was a good way to get into the crypto market without buying too much at high prices.
As it turns out, the strategy worked well. The second half of 2017 saw an epic run-up in crypto prices. The hard-coded rules of value averaging forced me to buy dips and, more importantly, take profits when prices got too high. I got out of 2017 alive.
It’s now October 2021 and the bitcoin chart looks very familiar. And I’m using this same strategy once more. But this time, there is one crucial difference – bitcoin is the base currency.
I aim to value average into altcoins in order to increase my bitcoin holdings over the coming weeks and months. This is based on my current thesis of how I think the crypto market is most likely to behave for the remainder of this year.
Market thesis: Bitcoin first, altcoins second
In 2017 bitcoin ran first, outperforming most altcoins. But once bitcoin cooled off, we saw an incredible surge in altcoins. The king rolled into battle first and his army followed. The same thing happened in 2020 when bitcoin broke $20,000 and rallied over 200%.
This makes logical sense and is a common pattern in the crypto market. Bitcoin brings in liquidity and steals the spotlight. Once investors have made dollar profits in bitcoin, they move further down the risk curve. They get more speculative and buy altcoins.
And given that altcoins have much lower market caps, many catch up and eventually outpace the king.
As it stands, the bitcoin dominance chart shows bitcoin is gaining strength versus altcoins. It looks like it is making a major W-bottom reversal pattern with Bollinger Band confirmation. We can see this in the chart below.
Of course, this does not mean bitcoin will outperform all altcoins in the coming weeks and months, but it does show bitcoin’s relative strength in the market.
Bitcoin Dominance (BTC.D) is forming a W bottom reversal pattern on the weekly chart. This suggests relative strength of bitcoin vs. altcoins.
Aside from the technicals, there are also fundamental reasons to be bullish on bitcoin right now:
- Stocks look wobbly.
- There is high inflation globally, and the digital gold narrative seems to be catching on.
- A bitcoin futures ETF also just got approved by the SEC.
While a bitcoin futures ETF is not as good as a spot ETF, it’s still a stamp of approval from the traditional finance world. It’s better than nothing.
Given the above factors, the bitcoin weekly chart looks insanely bullish. Yes, there can be extreme short-term pullbacks. But the below chart suggests that up is the path of least resistance for the rest of this year:
Bitcoin weekly chart. Taken 19 October 2021. The chart looks bullish.
What is Value Averaging?
Value Averaging (VA) is a bit like dollar-cost-averaging (DCA). Except with VA, you buy more crypto when prices are lower and less when prices are higher. You also sell when prices are very high.
This strategy can work well if you want to accumulate crypto over a certain time frame, but also take profits along the way if prices get too high.
The core assumptions of VA are that it is:
- Good to invest more when prices are lower.
- Risky to invest more when prices are higher.
- Sensible to take some profits when prices have gone up a lot.
Simple Value Averaging Example:
Assume Bob wants to spend the next 6 months accumulating bitcoin at good average prices. He wants exactly $600 worth of bitcoin 6 months from now.
Bob wants the ‘value path’ of his bitcoin investment to increase by $100 each month until it gets to $600. This differs from a DCA strategy, where Bob would simply buy $100 worth of bitcoin per month regardless of bitcoin’s price at the time.
With VA, Bob invests more or less than $100 each month depending on the dollar shortfall or excess of his bitcoin value to his value path.
In the first month, Bob spends $100 on bitcoin. To keep the maths simple, assume 1 bitcoin is worth $10,000 at this time. At this price, Bob gets 0.01 bitcoins for his $100 investment.
In month 2, bitcoin has halved in price. This means that Bob’s 0.01 bitcoins are now worth half what he paid for it—or $50. Since Bob’s value path must cross $200 in month 2, he must now make up the dollar shortfall and buy $150 worth of bitcoin.
Bob has now bought $50 worth of bitcoin at $10,000 in month 1, and $150 worth of bitcoin at $5,000 in month 2. This fetched him 0.01 bitcoins in month 1 and 0.03 bitcoins in month 2, thus giving him a total of 0.04 bitcoins.
In month 3, the bitcoin price doubles and is now $10,000 again, which means his 0.04 bitcoins are now worth $400. Since Bob’s value path must cross $300 in month 3, Bob now has a dollar excess of $100 worth of bitcoin. Therefore, he now needs to sell this at a profit to get back to his value path.
My strategy – Use Value Averaging to grow bitcoin value over coming weeks and months
While I won’t mention the amounts and the specific altcoins, my strategy is quite simple:
- Take X amount of bitcoin
- Create a ‘Value path’ over X number of investment periods
- Each investment period, value average into 8 different altcoins
To do this, I use a spreadsheet, which you can download at the end of this post. In the below video, I explain how the spreadsheet works:
Conclusion
There are many strategies for investing in the crypto market. This is just one of them. With that said, value averaging with bitcoin as the base currency could be a good option for accumulating bitcoin in a bull market.
As with all strategies, there are risks involved. So I’m not going ‘all in’ on this strategy.
You can download the spreadsheet here:
The usual disclaimer: none of this is investment advice. It’s just what I’m doing.
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