What is DCA in crypto investment ?

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What is DCA in crypto investment ?

DCA strategy crypto trading

If you are in the crypto world long enough, you probably already heard about this concept : the DCA. Abreviation for Dollar Cost Average, this is an investment strategy often used by investors. It is important that you understand what it is, and, how to use it efficiently.

In this article, i will try to explain this concept in simple words, but i will also provide example of how to use it, and make it more efficient.

The Definition of a DCA : Dollar Cost Averaging

DCA is short for “dollar cost averaging.” DCA is an investing strategy in which an investor divides up the total amount they want to invest into equal parts and invests those equal amounts at fixed intervals. This strategy is often used by investors who want to minimize their risk by buying into a volatile asset, like cryptocurrency, over time instead of all at once.

By doing so, you will smooth out the price over a longer period of time, reducing the volatility of the asset. Let’s say you have 1000 $ you want to invest in cryptos.

Because of the very high votality in the markets, the DCA strategy would be to divide this amount. For example, you could invest every month for 5 months, 200 $. Let’s say you decide to buy on the 1st of each month. Let’s take the price of Bitcoin at the end of 2022 :

  • July 2022 : 19 820 $
  • August 2022 : 23 652 $
  • September 2022 : 20 050 $
  • October 2022 : 19 430 $
  • November 2022 : 20 414 $

If you do so on Bitcoin, your average buying price would be : 20 673 $. This strategy smooth the buying price and reduce the volatility of the asset. On this example, you are very close to the lowest price of October which is 19 430 $, ( difference of 1 243 $ ), but you are quite far from the highest price of August, which is 23 652 $ ( difference of 2 999 $ ).

This strategy obviously is more efficient in a bear market. That’s why you also need to combine the DCA strategy with other indicators.

Let’s explore more deeply what are the true benefits of this DCA buying method !

The Benefits of DCA

Here is the different benefits of the DCA method that you could use in your future investments.

DCA can help to reduce the overall risk

DCA can help to average out the price of cryptocurrency over time, which can lead to more stability and less volatility. It reduces the risk of buying cryptocurrencies at the wrong time.

For example, if you had bought Bitcoin at the height of the 2017 bull run, you would have lost a lot of money when the price crashed in early 2018. However, if you had been dollar-cost averaging into Bitcoin since the beginning of 2017, you would have made a profit, as the price of Bitcoin is now higher than it was then.

DCA is a good strategy for long-term investors who are not worried about short-term price fluctuations.

It allows investors to build up their position in an asset over time, rather than having to put all of their eggs in one basket by investing a large sum of money all at once.

Build a position with a lower budget

DCA can be a good strategy for those with a limited budget, as it allows you to gradually build up your investment over time. Most people think you need a lot of money to invest, this is wrong.

Just think about your budget and percentage.

Whatever your revenues, if you can at least save / invest 5% of your incomes, this is already a very good start. Everyone who is now investing a lot of money started small one day !

Investing without the influence of emotions

If you try to invest a large sum of money all at once, you may find that the price has already risen by the time you have finished investing, meaning that you have missed out on potential profits. By investing a small amount each month, you can slowly build up your investment without having to worry about the timing of the market.

By investing smaller sums of money into an asset on a regular basis, investors can buy more of the asset when the price is low and less when the price is high. This can help to average out the price paid for the asset over time, and can potentially lead to higher returns in the long run.

If you have the discipline to stick to the original plan, you will be less likely to be influenced by emotions.

For example, you might have heard about the FOMO effect in crypto investments. Sticking to a DCA strategy would help you avoid this negative psylocological effect.

What is FOMO and how to deal with it ? Here is an article about it :

What is FOMO and how to deal with it

However, it is important to remember that DCA does not guarantee that you will make a profit, as the price of cryptocurrencies can go down as well as up. Here is the disadvantages of the DCA method.

The Disadvantages of DCA

There are also some disadvantages to using the DCA technique when investing in cryptocurrencies. One disadvantage is that it can take a long time to build up a significant position in an asset if the investor is only investing small amounts of money at a time. This can be a problem if the investor is trying to take advantage of a short-term price increase.

Difficult to have the discipline

Another disadvantage of DCA is that it can be difficult to stick to the plan. It can be tempting to invest a larger sum of money into an asset when the price is low, but this can negate the benefits of DCA. investors need to be disciplined in order to stick to their plan and reap the potential rewards of using this technique.

A long term strategy that requires patience

One is that it can take a long time to build up a significant position in an asset if investing small amounts regularly. This can be viewed as an opportunity cost, as the investor could miss out on potential gains if the asset price increases sharply in the interim.

Another downside is that the investor may not have a good understanding of when the asset price is likely to increase, meaning they could end up buying at a higher price than necessary. This could be mitigated by doing research on the asset beforehand, but it is still a potential risk.

Can be a pricy strategy

Finally, there is the potential for fees to eat into any gains made using this strategy. If an investor is using a broker that charges commission on each trade, or if there are other transaction costs associated with buying the asset, then these will reduce the overall return. If you use this strategy, make sure you find a plateform with low fees to avoid unnecessary costs.

The best DCA strategy in crypto

In order to maximize your gains with this method, it is important to follow these advices.

Have a plan and stick to it

  • Review your investment objectives and make sure that a DCA strategy aligns with them
  • Decide how much you are willing to invest each month and make sure you stick to that amount
  • Review your portfolio regularly to ensure that it is diversified and that you are comfortable with the level of risk you are taking : This means that you should always have the majority of your coins with the top cryptos of the market. If your portfolio is 80 % constitued with crypto that are out of top 100, this is way too risky on the long run.
  • Rebalance your portfolio as needed to keep your investment strategy on track : Following the previous tip, you should short term sell risky coins to secure on larger assets such as Bitcoin and Ethereum.
  • Stay disciplined and don’t let emotions dictate your investment decisions

Analyse the market and understand Bear & Bull market

As explained in the introduction, the DCA strategy works best when the market is down. The ultimate strategy would be to understand how to differenciate bull and bear market. By doing so, you can apply this afterwards :

  • Accumulate liquidity while in bull market
  • Use this saved liquidity to DCA invest in a bear market

Here is a few indicators that could help you determine wether or not we are in a bull or bear market :

  • Is the mainstream media talking about Bitcoin or crypto ? If so, are they bullish or bearish ? If you hear bad new / no news on mainstream media, we probably are in a bear market. DO NOT invest your money when all the media are constantly talking about “crypto as a revolution
  • Use the RSI index. The Relative Strenght Index is an indicator to when the market is underevalued or overevalued. Read more here to fully understand it and how to use it :

What is RSI index and how to use it

  • Use the MVRV. The Market value to realized value is a strong indicator showing if a market is overpriced or underpriced. Follow this link to understand how to use it :

What is MVRV and how to use it

  • Check the 200 WMA : The WMA is the weekly average price on an asset for the last 200 weeks. It is a strong indicator to analyse long term patterns. Make sure to read this guide to understand it properly :

What is 200 WMA in crypto and how to use it

Bitcoin Rainbow chart

Conclusion on DCA strategy in crypto

As i write these lines, december 2022, we are in the middle of a big bear market. It means that it’s the perfect opportunity to implement a DCA strategy on Bitcoin ! Nobody is talking about it anymore, or everyone is claiming that it’s a massive fraud, and everyone has lost more than 80% of their investments.

This is not true.

If you bought at the top price around 68 000 $, yes you have lost around 80 % of your investment. But what is the first rule about investments ? “Buy low, sell high”. People who sold at 68 000 $ are now reinvesting massively in Bitcoin. They are slowly and in the shadow preparing the next bull run. When will it occurs ? Net month ? In six months ? Hard to say. But it will eventually happens. And a DCA strategy in order to be prepared is the best thing to do.

Remember : Only invest what you can afford to loose !!! If at some point you need what you invested in Bitcoin or other cryptos, all your strategy falls appart. You need to implement a strategy where you freely choose when to sell, not because a random event occurs in your personnal life.