- Systematic Investment Plan (SIP) is a way of investing a fixed amount of money at predefined intervals to adjust for risk rather than investing a lump sum.
- SIP can be done daily, weekly, or even monthly and can be adjusted to reach one’s goals faster.
- SIPs are convenient — they put your investments on autopilot, help you leverage the power of compounding, and enable you to invest with discipline.
- Some tips for implementing a SIP include setting long-term goals, starting with smaller amounts and gradually boosting your investment, and keeping a tab on the asset’s performance.
- SIP don’ts include withdrawing your investment early and/or withdrawing profits. These practices will disable the power of compounding.
What do you recollect when you think of a Systematic Investment Plan (SIP)? Either stocks or mutual funds, right? It is clear to us that SIPs exist in the equity markets. But have you ever heard of SIP in cryptocurrency?
With more retail investors looking to participate and capitalize on the crypto market, SIP in cryptocurrency is rapidly gaining attention. We all know how volatile crypto is compared to stocks and equities. SIPs can be a great way to tackle it.
Most investors usually have different goals at different stages of life. To achieve these long-term goals, SIP in crypto helps by earning better risk-adjusted returns. But before opting for SIP in crypto, it is essential to know about it for better decision-making. Here is a complete guide.
What Is SIP in Cryptocurrency?
SIP in the stock and mutual fund markets has proved its ability to reduce the impact of volatility over time. This feature has been instrumental in capturing the power of compounding, especially when you reinvest your earnings.
Let us consider a scenario to understand how compounding impacts returns. Suppose you decide to invest $1000 at the beginning of every year.
That investment attracts a 10% return every year. Your principal amount is $1000, and the earnings at the end of the year would be $100 (10% of $1000). Then, the following year, you earn returns on:
- 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.
So your total investment amount will be $1100 (previous year) + $1000 (current year); thus, your returns being marginally higher.
Even though the first $100 in returns might appear small, it can significantly make a difference when you invest over a long time. This is how SIP in crypto can emerge as one of the best processes of building wealth.
Investing a lump sum amount in a volatile market such as crypto may not be a good idea. Instead, you can spread your investments in regular intervals (daily, weekly, monthly) through SIP and combat volatility.
How Does SIP in Cryptocurrency Work?
SIP is a method of regularly investing a fixed amount of money, whether daily, weekly or monthly. Investors can choose to invest in particular crypto or a crypto basket. They can also gradually increase their investment over time to reach their goals faster.
For instance, if you invest $200 monthly in a SIP and after a year, your salary increases, you may also want to increase your contribution to your investments.
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.
SIP in cryptocurrency is more convenient as it allows you to invest in smaller amounts rather than lump sum investments. You don’t need a considerable amount to build your diversified crypto portfolio. With Mudrex Coin Sets, you can start SIP with an investment of as low as $5. You can even skip a SIP when you fall short of cash.
2. Autopilots your investments
With SIP, a specific amount gets debited from your account to your investments at specified intervals. This helps eliminate the friction one would face in making a purchase every time. You can also set up multiple SIPs in different cryptocurrencies and passively build a portfolio.
3. Dollar-cost averaging
Volatility is a primary concern of most investors, and SIP is one of the best ways to tackle it.
Through SIP, investors enter the market at various price points. Sometimes they would buy less for more, while other times, buying more for less. This helps them average the overall cost at which they buy an asset. In other words, it reduces the impact of volatility in the long run.
DCA is the most commonly used method to eliminate risk exposure to sudden market movements.
For example, Assume you set a SIP for $200 in ‘X coin’; the first month, you buy 100 at an average price of $2. After a month, if the price of the coin drops to $1, you buy another 200 coins at the cost of $200. Now, the average cost would be $1.33. But if you had invested your entire capital initially, your cost would have been greater.
Read more about: What is Dollar-cost Averaging here!
As discussed above, the crypto market is volatile, which is one of the main reasons compounding can be great for crypto assets. Through SIP, you can reinvest your returns and generate wealth. But remember, to benefit from compounding, keeping the principal and earnings invested for the long-term is vital. The more time you give to your investments, the more you may be able to yield the income potential from previous earnings.
5. Disciplined investing
SIP is a great way to stay consistent with your investments. It helps you build a habit of regular savings and investing. It may be especially helpful if you are a spendthrift because as soon as your paycheck hits your account, you can set up a SIP for that day, and your investment account will automatically be credited.
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.
1. Set long-term goals
When you invest through SIP in cryptos, stocks, or mutual funds, you need to have a long term mindset for your investments. It is a steady way to build your wealth by reinvesting the returns.
2. Start with small amounts
You should always start with smaller amounts and see how your savings grow with time. Some amount of money regularly put through SIP in crypto can assure you better risk-adjusted returns.
3. Frequently boosting the investments
Returns are directly linked to your investments. The more you invest, the better your returns may be. Once you start a SIP, you should gradually increase your investment amount to also grow your returns.
4. Keep a tab on the performance of the crypto asset
Since the primary objective of every investor is to earn maximum returns, it is vital to keep an eye on the performance of a crypto or crypto basket that you have invested in. If you feel that the performance is not up to your expectations, look for some other crypto and start investing.
1. Early withdrawal
There must be times when you need to withdraw your investments in cryptos to meet unexpected circumstances. But in such cases, make sure you either exit the market when it is high or at least ensure you are withdrawing the returns part of the investment so that the rest keeps generating returns for you.
2. Take your profits out
Reinvesting can enable the power of compounding. You may not be able to avail full benefit of SIP if you take your profits out early. Secondly, taking profits out frequently might not be a healthy practice as it would also lead to paying taxes on short-term capital gains.
SIP in Cryptocurrency Pros & Cons
Pros of SIP in crypto
- SIP allows investors to invest in smaller amounts
- It minimizes 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
SIP in cryptocurrency is potential enough to yield better risk-adjusted returns in a volatile market. Though there are some cons, the advantages overpower the disadvantages. It is a disciplined type of investment that lets you create a diversified portfolio. If you want to avail these benefits, try SIP in crypto now.
1. Is there SIP in cryptocurrency?
Yes, there are SIPs in cryptocurrency around the concept of Dollar Cost Averaging. A specific amount of money is debited from your account regularly and invested in particular cryptocurrencies. Dollar Cost Averaging helps attain better buying prices than buying lump sum.
2. What does SIP mean in crypto?
Much like SIPs in Mutual Funds, SIPs in crypto give you the liberty to invest in single or multiple cryptocurrencies at regular intervals by automating the purchase. It makes the magic of compounding work for you.
3. Is it good to do SIP in cryptocurrency?
For newbies in the crypto market and risk-averse investors, SIP can be a great way to average the buying price and reduce the exposure to volatility to a certain extent.
4. How do I invest in crypto SIP in India?
Many crypto platforms in India give the option to start a crypto SIP. You can sign up on Mudrex and set up your crypto SIP for just $5 and join the 700,000+ investors on the platform.