DCA, a simple and effective strategy? – The price of Bitcoin shows an impressive rise in 2023, it clearly outperforms other financial assets such as gold, the NASDAQ or the S&P 500. After a catastrophic year 2022, cryptocurrencies woke up in 2023.
However, some operators have not managed to really benefit from this increase. What strategy should you adopt as a beginner? If some will use technical analysis, fundamental analysis or evenon-chain analysis, others will choose DCA (Dollar Cost Averaging). Many analysts promote this strategy for beginners (and not-so-beginners). Since August 2020, the company MicroStrategy led by Michael Saylor implemented a DCA strategy. MicroStrategy is playing a dangerous game, but will Michael Saylor’s bet pay off? In this article, we will return to this strategy that is accessible to everyone, and which has proven itself. However, planned investment can also carry risks.
Doing DCA on Bitcoin and cryptocurrencies: what does that mean?
Definition and variations of Dollar Cost Averging
THE DCA or Dollar Cost Averaging is the fact ofbuy an asset on a regular basis, whatever the price of this asset and with a fixed amount. Let’s take a concrete example:
- Every month, Paul has 50 euros to invest in Bitcoin. Once a month, on a date established in advance (to avoid being disrupted by the evolution of the Bitcoin price), he will invest his 50 euros.
You will have understood that the price of Bitcoin is in bull marketor in bear market, Paul will invest in Bitcoin. By deciding tospread out your purchaseswe take advantage of the decline to accumulate more significantlyand we also agrees to buy fewer assets when the price increases. This is the principle of planned investment.
For those who wish, you can also decide to invest a larger amount when the price falls sharply (-10%, -15%, -30%, etc.). However, it seems essential to put a plan in place, and stick to it. Indeed, decisions taken in conditions of sharp declines or sharp increases could negatively impact their decisions. A strict DCA allows an investor to don’t let your emotions take over.
DCA: a strategy that survives bear markets
Many investors are losing their teeth over the orange currency created by Satoshi Nakamoto. Indeed, the fact that Bitcoin has a relatively low capitalization (compared to gold for example) brings a volatility which can make a newbie, and even experienced traders, make bad choices. Most investors tend to discover cryptocurrencies when talking about them to the mediaand very often this happens relatively late in a cycle.
A neophyte who invests in BTC in start of bull market can escape the harshness of bear marketsbut he can succumb to falls which are sometimes relatively violent. In fact, in bull marketit is not uncommon to see BTC mark drops of 30% or more. An investor who hears about Bitcoin in May 2021, or in November 2021, may decide to put a substantial sum in BTC thinking that there is still time before finding a market top. The bearish market was responsible for melting the investment of a good number of operators like snow in the sun.
So, is DCA a solution to this volatility problemand facing a intense bear market ? To answer this question, there is nothing better than to look at a concrete case:
Thanks to the DCA strategyan operator who would have decided toinvest at the end of 2017 (at the top of the market) and who would have continued his strategy until November 2020 would have :
- Invested a total of 1,800 euros.
- A portfolio worth 3,966.77 euros (120%).
Concretely, in investing in the worst of timesthis fictitious investor would have made profits without the price of BTC marking a new all-time high. Indeed, an ATH was marked on November 30, 2020 (Binance). A portfolio that would have followed the same plan starting at the market peak on November 10, 2021 would currently record a performance of 60%. This, while the course of Bitcoin is relatively far from a new all-time high.
The advantages and disadvantages of the DCA strategy
The benefits of recurring purchases
Thanks to the example presented above, we can easily identify some advantages of applying a DCA strict. Indeed, the time spent in front of graphics is zero. There is no no need to have any knowledge in technical analysis, fundamental analysis or any other analysis. Thanks to the DCA, the Bitcoin volatility problem clearly becomes an advantage. Also, with this strategy, the emotions have little impact on the operator. Emotions can sometimes be an enemy when making decisions.
Applying a DCA allows you to dilute your risk. In fact, if we have a capital of $10,000 to put in cryptocurrencies, it is relatively risky to invest them all at once. With a DCA, our $10,000 cannot be fully invested during a market peak. Historically, markets tend to move upwards, that’s why this strategy works. However, you must be vigilant.
Planned investment carries risks
In a general way, all investments carry risks, and you need to know them before deciding to get started. The DCA strategy is no exception. Some experts do not like this strategy, because it potentially requires accept reductions which may prove very significant (drawdown). Here is the example of a portfolio which would have invested at the top of the market in 2017 and which would find itself facing its investment at the bottom of the market in 2018:
During this period, the investment does not bear fruit. An investor could then decide to stop and resell with a deadweight loss of 50% on his portfolio. Of course, this is an extreme case. However, it shows that we must deal with your emotions in any type of strategy.
Also, it must be understood thatan asset can lose all its value, and even disappear. In fact, such a strategy can only be applied to assets that we would be able to keep at any price :
“Only buy things that you will be perfectly happy to own if the market crashes for 10 years.” »
Warren Buffett.
If Bitcoin presents risksit is probably thesafest cryptocurrency asset. Apply a scheduled investment to a Very small cap altcoin could prove – very – dangerous.
In conclusion, DCA can be a formidable strategy for a newbie or even a more experienced investor. Until today, this strategy works on Bitcoin which marks cycles of bullish and bearish markets since its creation. However, this strategy is not perfect. You must be able to manage your emotions in the event of a sharp drop in the price level. Also, this type of strategy should be avoided on altcoins with very low capitalization. To try to improve its performance, an operator can help bytrend indicatorsor indicators on-chain which have proven their relevance on Bitcoin. To avoid the feeling of frustration when the market falls, an investor has the option of diversifying his capital. This is to avoid putting all eggs in one basket.