How to implement a Dollar Cost Average (DCA) strategy?
Knowing with precision when is the best time to buy or sell a cryptocurrency to maximize profits is not only a highly challenging task, but for most of us, it has become an impossible mission. Fortunately, today we are going to explore an alternative strategy, known as Dollar Cost Average.
Popularized with its acronym, DCA, it is a way to manage our capital in an efficient and less impulsive way. This strategy has beaten the market so many times and its followers are quite happy with it.
Without having any aim to give some financial advice, we are going to get in touch with this game plan, which could give us a hand in order to have some savings in a cryptocurrency that we want to hold. Let’s dive in.
What is Dollar Cost Average (DCA)?
Dollar Cost Average or its acronym DCA is a simple but quite useful strategy in order to accumulate some asset that we aim to hold for a determined period of time. Generally, DCA will be a handy plan when we plan to stick to an asset, in our case a cryptocurrency, for the long term.
Instead of trying to beat the market, buying a specific crypto at its lowest price and selling it at its all-time high, we would establish some rules that will let us forget about charts, technical analysis and guessing the next candle.
If the last paragraph sounds like music to your ears, DCA may be a master plan for your saving strategy. But, before getting deeper into what Dollar Cost Average really is, we need to understand why is it a well-thought-out strategy.
Why is DCA a good strategy?
I’m not saying anything novel with the following sentence:
“Cryptocurrencies are an extremely volatile asset”
However, what could be the best way to beat the great volatility that this market possesses? First, let’s picture the opposite strategy. Imagine that we are set at the end of the third quarter of 2021. Our imaginary friend Mark is quite bullish about bitcoin, he thinks that this year bitcoin will see its all-time high.
Mark doesn’t know a lot about technical analysis, but due to the macroeconomic environment, he thinks that he should sell all the bitcoin that he has before the end of the year. So, April has come and Mark has some money to buy that bitcoin, he’s ready. Suddenly, Mark takes the Leap and on the 12 of April, he put everything he has into bitcoin.
After doing that risky move, Mark spent five days on profits. Then he sees the price of bitcoin going down to $30.000 when he bought it at $59.000. Now that we are at the end of 2022, we know that Mark should wait until October 2021 to sell its bitcoin on profit, but will he have the guts to do it?
It seems like, that using all your capital to buy a cryptocurrency in one move is not the best option. But, what if we have a more progressive and conservative option to buy an asset that we want to hold for a determined period? It exists, and it is time to get to know it.
Dollar Cost Average, can be a very profitable strategy in a Bear Market
How to do DCA?
If our friend Mark have learned about DCA before throwing all its money into bitcoin in April of last year, today he will have had more money and, definitely, will have had a less stressed 2021.
The DCA strategy is about following a couple of simple but uncompromising rules.
It simply consists of buying the same amount, measured in dollars of, in our case, a cryptocurrency that we would like to accumulate at a pre-determined frequency over a pre-defined period of time.
Let’s take another example from our friend Mark to help us understand this strategy.
As Mark was thinking, the best time to sell its bitcoin would have been approaching the end of last year. Knowing what DCA means, Mark could have said, from April 12 I will buy 100 dollars of bitcoin every Wednesday until I swap all my reserved amount for this strategy, and I’ll sell all the bitcoin that I had bought in mid-November.
Well, I know that this example can sound a bit manipulated in order to favor the DCA strategy, however, if you do some simple math you will see how profitable Mark could have been
The simple set of rules to do DCA
To sum up, to be consistent and implement a dollar-cost-average strategy, we just have to attach ourselves to the following set of rules:
- Establish a buying amount, measured in dollars
- Determine an asset to buy
- Define the frequency with which the DCA is going to be executed
- Set the time period over which we will take this strategy forward
By respecting this straightforward set of guidelines, our DCA strategy will be successfully executed.
Automated options
This kind of strategy becomes extremely popular and one of the most used strategies when we find ourselves in a bear market, such as the one we are experiencing in this tough year we are going through. Without taking it as financial advice, it is extremely common to read or hear that these types of markets are perfect for accumulating those assets that we believe will be the most desirable in the next bull market.
The previous sentence is perhaps an explanation of a trend we have noticed recently in the crypto ecosystem. For the first time in the short history of the DeFi world, we are seeing the emergence of a large number of decentralized platforms that are responsible for automating the DCA strategy.
With Mean Finance leading the way in various Ethereum-compatible networks, followed by CALC Finance which aims to bring this strategy to the growing Cosmos ecosystem, automatic DCA opportunities are proliferating across the crypto world.
You may be asking yourself, how do they work? Well, the concept is quite simple:
- We deposit our cryptos
- We set the timing
- Automatically the platform will be buying the desired crypto for us
Following a DCA strategy has never been easier.
With the Dollar Cost Average, we forget about trying to beat the market and stick to simple rules to accumulate the desired asset
Final thoughts
It goes without saying that nothing could be further from the spirit of this article than giving financial advice or influencing the way our readers manage their own money.
Clearly, when the crypto world is hit by long bearish periods, interest in the DCA strategy grows.
However, we believe that the most important thing is to understand each strategy available in the market in advance and then, when the time comes, apply the one that we believe is best for our portfolios and, above all, our peace of mind.