Dollar Cost Averaging
The benefits of DCA, how to do it right, which exchange has the best tools for it.
DOLLAR COST AVERAGING DEFINITION
Dollar cost averaging, or DCA, means investing set amount of money into an asset on a regular basis, disregarding the price action.
In other words.
- To do a monthly DCA into cryptocurrency, you spend the same amount of fiat on that cryptocurrency every month.
- You buy your DCA share of crypto on the same day every month, regardless of how the market is moving.
Part 1.: Introducing DCA in crypto
So.
DCA is a technique that has been strongly recommended by Warren Buffet. Not with crypto, obviously, why would he do that.
If you want to make your own mind though, keep reading.
DCA IS A LONG
It may seem that DCA is a way to avoid making all directional decisions.
That is wrong though: DCA is a long-term long position. You are avoiding short-term speculation.
And why not, even if you’re a trader. Often there simply isn’t a good enough opportunity to trade on TA.
Dollar cost averaging is in fact a way to build a long position in an ultra long-term time frame. This needs you to have strong long-term bullish bias for that market.
Which, by the way, is why DCA became popular as an easy way to profit from the “eternal growth” of stocks.
BENEFITS OF DCA
The benefits of dollar cost averaging show best in markets that have been slumping or ranging.
The volumes get quite low then.
With low trading participation on the market the predictive powers of technical analysis decrease as well. Every market weakness can be hammered into an abrupt run in either direction. Every little sell off makes people panic.
If you DCA, you don’t get to check these short term realities at all.
That can be a very good thing even for traders. Remember that traders get burnouts from overtrading?
WHERE TO DCA INTO CRYPTO
We are humans, and avoiding fear and greed can be hard.
The point of DCA strategy is you stick to your long-term bias come what may. This is best done when automated.
- Exchanges like Independent Reserve have a feature called Auto Trader.
- Do your KYC/AML and set up a monthly transaction from your bank to the exchange.
- Set up the Auto Trader to buy a cryptocurrency for a set percentage of your balance once a day.
- Once your money arrives at the exchange, your DCA will be executed.
- On days there is no deposit in your exchange wallet, the Auto Trader will not execute.
Part 2.: Crunching the numbers
Now that we’ve explained what DCA is, let’s take a look at why it is more effective than simple hodling.
WHY DCA BEATS “HAVING A STASH”
Dollar cost averaging into a cryptocurrency is indeed a bigger commitment than a short-term bet.
But over time, it makes for a bigger commitment than simple hodling.
- Your potential profits are higher too.
- The time cost is minimal since you don’t watch the charts.
- Your downside is limited, there is no leverage.
Long-term hodlers have bought their stash in a few splurges. Since then, they have their stash and simply follow the price development to see if it got high enough for them to cash out.
So, hodlers are bullish, otherwise they wouldn’t have hodled.
But they are not increasing their position, nor cashing out regularly. They hold a stash on an out-of-date Electrum wallet, and don’t think about it.
The thing is, if you plan to hold for maybe a decade or so, even if you can DCA with not more than lunch money, the difference between “having a stash” and DCA amounts to quite a lot.
So then, since you are bullish, why don’t you maximise your profit?
DCA, HODLING ON STEROIDS
Let’s crunch the numbers.
The two tables below show the net worth of an investor who bought a stash of 10, 50 or 200 BTC at 10k or lower.
50k USD is a reasonable conservative target for the next bull cycle
We’re mapping how the value of the stash rises if BTC gets to 50k+ USD.
No DCA, Long-Term HODL Only
If you started with a stash of 10 BTC only, your best chance in the optimistic scenario is hitting 1 MM USD. That is, ever. It can be next year or in 30 years.
Now let’s throw monthly DCA into the mix.
Decade-long DCA Illustration
To illustrate the point, I took Quandl monthly BTCUSD data. I got the average price for each month.
Since this is only an illustration, and idea it illustrates is basically a bullish bias, I simply threw a linear regression onto the data.
From this fantasy linear trend I got an average monthly increment of 153 USD in the price of bitcoin.
We start our imaginary DCA bitcoin journey at 10k a coin and assume the price will get to 50k a coin after 20 years.
In 20 years of monthly DCA, you will make 240 purchases in total.
How much will you buy?
Let’s say you have monthly disposable income of 2k USD. You can spend 2k USD every month on anything you like.
- At 10k your extra money get you 0.2 BTC.
- At 50k, your extra money get you 0.04 BTC.
Adding up all 240 purchases, you will have a sum of 20.5 BTC added to your stash over two decades of DCA.
Not too shabby.
For crypto investors who didn’t have the money to buy 3 digits of bitcoin at the start, DCA can really make a big difference.
Plain hodling of what they once bought is much less profit for what already is a long-term bullish bias.
Things get even juicier on a higher disposable income…as they usually do:
As a side note, higher disposable income doesn’t have to mean pay rise.
Your disposable income can also grow from the difference of living in a metropolitan area versus some less trendy place. Hello, global pandemic.
Anyway.
I hope you understand how counter-productive it is to sit around watching the charts and willing the price to go up, if you are just a hodler.
If you are already so bullish, then DCA and move on with your life.
Key Points
- Dollar cost averaging in crypto is a method to progressively build an unleveraged long position in your cryptocurrency of choice.
- DCA is a good method for you if you have regular income and bullish outlook on crypto in the long-term horizon.
- Small monthly contributions over long time add up. If you are bullish on crypto and do not want to sell yet, plus have some disposable income, why don’t you increase your stack?
- Dollar cost averaging performs better than hodling, if you are long-term bullish and have income but do not have a lot of money to invest at once.
- Babysitting the charts if all you are not an active trader is a waste of time.
Loosely based on an article at https://www.altcointrading.net/strategy/dollar-cost-averaging/
