VA Explainer and Use Cases
What is Value Averaging (VA)?
Forecasting whether prices have reached their peak or bottomed out in the short term is one of the most challenging aspects of asset investment. Instead of investing a lump sum all at once, which risks buying at a peak, Value Averaging (VA) provides a systematic approach to accumulating investments over time. VA not only helps to smooth out the overall cost but also adjusts the investment amount based on market performance, potentially lowering the cost basis and enhancing long-term profitability.
If you have confidence in the value of an asset, adopting a VA strategy proves to be an effective method for gradually accumulating it over time.
How VA works?
Value Averaging (VA) involves setting a target value for your investment portfolio at regular intervals. You then adjust your investment amount to meet this target, investing more when prices are low and less when prices are high. This method contrasts with Dollar-Cost Averaging (DCA), where you invest a fixed amount at regular intervals. Jupiter's VA automates these adjustments for you.
When to VA?
Volatile Markets
Cryptocurrency is a highly volatile market, prices can swing dramatically within short periods. VA helps to mitigate the impact of these fluctuations by adjusting investment amounts based on market performance. When prices drop, you invest more, and when prices rise, you invest less, effectively capitalizing on market volatility.
Long term strategy
Since VA is effective at capitalizing on market volatility, regardless of market conditions, VA can be a good tool to build portfolio and invest consistently based on market conditions. In bear market scenarios, VA can be used to steadily accumulate and contrastingly, VA can be used to take profit during a bull market. VA can be more attractive to than using a set contribution schedule is that you are somewhat protected from overpaying when the market is hot. If you avoid overpaying, your long-term returns will be stronger compared to people who invested set amounts no matter the market condition.
Splitting up large orders
Executing market orders, whether through decentralized or centralized exchanges, can lead to negative price impacts, particularly in times of exceptionally low liquidity or with a substantial capital. This is where Value Averaging (VA) proves invaluable. By adjusting your order amounts based on market conditions, you exert less buying/selling pressure on the market, ultimately securing a more favorable average price. With Jupiter's VA, you have the flexibility to adjust your orders dynamically. In essence, this transforms into a variation of a TWAP (time-weighted average price) strategy, a method frequently utilized by major investors to strategically accumulate/dispose of assets.
Selling tokens with low liquidity
Tokens with low liquidity levels pose a challenge when it comes to selling, as doing so can create significant downward price pressure, leading to larger losses than necessary. Employing a Value Averaging (VA) strategy can alleviate this issue by adjusting your selling activity, thereby reducing the overall selling pressure and potentially boosting your returns.