SIP In Cryptocurrency: What You Need To Know

SIP In Cryptocurrency: What You Need To Know

When you think of a systematic investment plan (SIP), what comes to mind? Either stocks or mutual funds, right? We are well aware that SIPs exist in the stock market, but have you ever heard of SIPs for cryptocurrencies?

SIPs for cryptocurrencies are rapidly gaining ground as more and more retail investors want to participate in and profit from the cryptocurrency market. We all know that cryptocurrencies are highly volatile compared to stocks, and SIPs can be a great way to solve this problem.

Most investors usually have different goals at different stages of their lives. To achieve these long-term goals, SIPs on cryptocurrencies offer better risk-adjusted returns. But before choosing a cryptocurrency SIP, it is important to learn more about it to make a better decision. Here is a comprehensive guide.

What is SIP in cryptocurrency?

The SIP for equity and mutual fund markets has demonstrated its ability to mitigate the effects of long-term volatility. This feature plays an important role in harnessing the power of compound interest, especially when reinvesting income.

Let’s analyze a scenario to understand how compound interest can affect returns. Suppose you decide to invest $1,000 at the beginning of each year.

This investment generates an annual return of 10%. Your principal is $1,000 and your return at the end of the year will be $100 (10% of $1,000). The following year you will receive a return from this operation.

  • The initial $1000,
  • The return on the return made at the end of the previous year ($100) and
  • The new $1000 investment for the current year.

The total investment would then be $1,100 (last year) + $1,000 (this year), with a slightly higher return.

Although the returns on the first $100 may seem small, they can make a huge difference when investing over time. In this way, SIPs in cryptocurrencies can be one of the best wealth-building processes.

A one-time investment in a volatile market like cryptocurrency is probably not a good idea. Instead, you can spread your investments over a fixed period of time (daily, weekly, monthly) and combat volatility with a SIP.

How does SIP in cryptocurrency work?

SIP is a method of investing a fixed amount on a regular basis, which can be daily, weekly, or monthly. Investors can choose to invest in a specific cryptocurrency or a basket of cryptocurrencies. They can also gradually increase their investment to reach their goals faster.

For example, if you invest $200 per month in SIP and your salary increases after one year, you can also increase your investment contribution.

What are the benefits of SIP in cryptocurrency?

There are many pros to investing with SIP in cryptocurrency. Here are some of the prominent ones.

1. Convenient 

A SIP in cryptocurrencies is more convenient because it allows investing smaller amounts rather than a single sum. A large sum of money is not needed to build a diversified cryptocurrency portfolio. With the Mudrex Coin Kit, you can start a SIP with an investment of only $5. If you do not have the money, you can also skip the SIP.

2. Autopilots your investments

With SIP, a certain amount of money is deducted from your account and allocated to your investments at a specific time. This eliminates the friction you encounter with each purchase. You can also create multiple SIPs in different cryptocurrencies and passively build a portfolio.

3. Dollar-cost averaging 

Volatility is a major concern for most investors, and SIPs are one of the best ways to address this problem.

With SIP, investors enter the market at different price levels. Sometimes they buy less and buy more, and sometimes they buy more and buy less. This helps them calculate the total cost of buying an asset. In other words, it reduces the impact of volatility in the long run.

DCA is the most common way to eliminate the risk of sudden market fluctuations.

For example, suppose you have created a SIP of $200 in “currency X”; in the first month you buy 100 of them at an average cost of $2. A month later, when the price of the currency drops to $1, you buy another 200 coins at a cost of $200. Now the average cost will be $1.33. But if you had invested all your capital first, your cost would have been even higher.

4. Compounding 

As mentioned above, the cryptocurrency market is volatile, and this is one of the main reasons why compound interest can work well for cryptocurrencies. With SIP you can reinvest your returns and create wealth. But remember that in order to benefit from compound interest, it is essential to preserve capital and investment returns over the long term. The more time you spend on investments, the more you are able to capitalize on the income potential of past capital gains.

5. Disciplined Investing

SIP is a great way to stay in tune with your investments. It helps you get into the habit of saving and investing regularly. It can be especially helpful if you are a spendthrift: as long as your paycheck is in your account, you can set up a SIP for that day and your investment account will be credited automatically.

What is a good SIP investment strategy?

An investment strategy is simply a way of building a portfolio. Here are some essential things to consider while creating a good SIP investment strategy.

Do’s

1. Set long-term goals  

When investing in cryptocurrencies, stocks or mutual funds through SIP, you need to take a long-term view of your investments. This is a solid way to build your wealth by reinvesting returns.

2. Start with small amounts 

You should always start with a smaller amount and see how your savings grow over time. Regularly investing a portion of one’s money in cryptocurrencies through SIPs can provide a better risk-adjusted return.

3. Frequently boosting the investments

Returns are directly related to your investment. The more you invest, the higher the returns can be. Once you start a SIP, you should gradually increase the amount invested and increase the returns.

4. Keep a tab on the performance of the crypto asset

Since the primary goal of every investor is to obtain the highest possible return, it is crucial to monitor the performance of the cryptocurrency or basket of cryptocurrencies in which you are invested. If the performance does not meet your expectations, look for another cryptocurrency and start investing.

Don’ts

1. Early withdrawal 

There are bound to be times when you have to withdraw your cryptocurrency investments to deal with unforeseen circumstances. However, in these cases, you should make sure that you exit the market when it is at a high level, or at least withdraw that part of the return on your investment so that the rest continues to generate returns for you.

2. Take your profits out

Reinvestment activates the power of compound interest. If you withdraw your gains early, you may not be able to take full advantage of SIP. Second, it may not be a healthy practice to withdraw capital gains frequently, as this may result in the payment of short-term capital gains tax.

SIP in cryptocurrecny pros & cons

Pros of SIP in crypto 

  • SIP allows investors to invest in smaller amounts
  • It minimises the risk of volatility to a certain extent
  • Can avail the benefit of compounding
  • It is quite flexible and naturally helps build a disciplined way of investing

Cons of SIP in crypto 

  • Cashing out in a bear cycle may lead to lower returns
  • It is a long term strategy and may take considerable time to show results

Conclusion

SIP for cryptocurrencies may be sufficient for better risk-adjusted returns in a volatile market. Although there are some disadvantages, the pros outweigh the cons. It is a disciplined form of investment that allows you to build a diversified portfolio. If you want to benefit from these advantages, try a cryptocurrency SIP now.

FAQs

Is there SIP in cryptocurrency? 

Yes, cryptocurrencies provide SIPs based on the concept of dollar cost averaging. A certain amount is regularly deducted from your account and invested in a specific cryptocurrency. The Dollar Cost Average helps you get a better purchase price than a one-time purchase.

What does SIP mean in crypto? 

Like the SIP for mutual funds, the SIP for cryptocurrencies gives you the freedom to invest regularly in one or more cryptocurrencies by automating the market. It makes the magic of compound interest work for you.

Is it good to do SIP in cryptocurrency? 

For beginners in the cryptocurrency market and risk-averse investors, SIP can be a good way to average market prices and reduce volatility risk to some extent.

How do I invest in crypto SIP in India? 

Many encryption platforms in India allow you to start an encrypted SIP. You can sign up for Mudrex and set up your own encrypted SIP for only $5. Most people are already using it and reaping the benefits.

 

 

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