Save Dollar-Cost Averaging for the Bear Market

People talk about dollar-cost-averaging (periodically and routinely putting capital into an investment) it’s some magical and perfect strategy. I’ll probably get crucified for this, but DCAing is not what we should be showing to new investors. I’ve always had my doubts about the approach.

Obviously, a lot of us invest whenever we get a paycheck (once every couple of weeks), but what if you had the opportunity to invest all of that capital upfront? Would DCAing still be as attractive?

Or is it actually one of those risk-averse strategies that helps with anxiety more than boosting your portfolio?

Today, we’ll take a real-world look at the execution of the strategy as it might apply to a real-world investor.

Is DCAing a Silver Bullet?

The further back you go, the better DCAing works, as you were able to pick up cryptocurrencies before prices went parabolic. But realistically, I don’t think a lot of crypto investors were here a year ago, and those who did probably already had some type of investment strategy in place.

So let’s take a realistic approach to this question: I’m going to assume an investment of $100 every two weeks. I figure that’s probably a pretty common and reasonable number for most cryptocurrency investors. Maybe you can only afford $10 every week, maybe your number’s closer to $1000. You can add or subtract a zero on the final number depending on what your finances look like.

We’ll start with Friday December 18—payday. Let’s take a look at each cryptocurrency individually as well as a basket of these five cryptos. I’d also like to emphasize that this experiment isn’t meant to compare cryptos against each other—no one truly knows what a given cryptocurrency will do in terms of price. Instead, we’re comparing these investments to a specific benchmark: simply holding the same dollar value of your initial investment.

Here’s a table of how investing all at once, then HODLing (Holding on for Dear Life) compares with dollar-cost-averaging:

Average Cost:

With this DCA strategy, we can calculate an average cost basis for our crypto purchases. The table below can help us understand exactly what dollar-cost averaging does in terms of smoothing out pumps and buying dips, and compares it to our cost basis if we just were to go all in right away.

This table is obviously flawed: of course things were cheaper at cheaper prices!

But I don’t think the comparison is actually entirely unreasonable: in late December, in early January, crypto investors knew we were sitting at low prices. We were a bit over six months removed from the halving, which has historically been a bull-run triggering event. Cryptos were far removed from all time highs.

My point: a savvy investor would’ve been bullish at this point in time, and committing to this investment is not entirely unreasonable. And based on the math, it’s far preferable to have put all your money in at this stage than to DCA in.

A Caveat

I’m not advocating throw in your money at an all-time-high, just the opposite. In fact, every time you a buy an asset after it has dropped in price, you guarantee yourself to not have bought the peak.

If anyone’s advocating for buying the FOMO, it’s the DCA-ers. They say you should throw in money at the absolute peak, as long as that peak coincides with your investing schedule. No, I say: buy after the price dips or buy below all-time-highs.

So here’s my revised formulation: don’t DCA when navigating bull markets.

A Reasoned Argument for Going All-In:

Let’s take away discipline and timing.

What if you just bought in (we’ll use bitcoin for this example) with all of your available capital at a random point in our observed time window (since December)?

There’s about a 55% chance that you’d end purchasing bitcoin at a lower price than your dollar-cost-average cost basis if you would’ve just randomly guessed. Let me repeat that: in a bull market, random chance is better than DCAing.

And it makes sense: crypto tends to move up aggressively after long periods of relative stability. So big moves above long-time price ceilings are usually relatively sparse and don’t last long, while there’s typically plenty of time to buy in at low levels.

In these overvaluation phases above all-time highs, if you can hold your powder dry and wait for a dip, you’ll end up better off.

So Why Do People Recommend Dollar-Cost-Averaging?

Dollar-cost-averaging is, at its core, a risk-mitigation technique, and that’s why it’s so frequently recommended. But risk always comes with a tradeoff—in this case, it’s the risk of buying in while crypto is overvalued.

So sure, DCAing will lower your cost basis compared to going all-in at the peak, but it would’ve been better to just wait for dips (or better yet, invest early).

It’s hard to do that, though, and even harder to buy when prices are at local lows. But realistically, every time you can lower your cost basis, you should. Every time an investment might raise your cost basis, you should think twice. But it’s easier to invest in assets that are going parabolic than to invest when assets are camped out at low prices.

Ok, What’s Better, Then?

What’s a better strategy, you ask? A rational investor that understands their personal biases and psychology knows that some type of risk-adjusted model must be employed to help you buy at low prices. The Rainbow Price Chart is a free tool that helps adjust for risk and encourages you to buy at low valuations. I’ll write about it next week.

Every investor wishes they would have bought at lower prices, but actually pulling the trigger is a different story.

A Case for DCAing

So the math says it’s superior to invest upfront, or at least to buy a dip. There are a couple of issues with that plan:

  • It’s emotionally difficult and stressful to deal with market fluctuations
  • You need to have a chunk of money saved up

So it’s fair to DCA if you’ve just gotten into investing and you don’t have any capital to deploy. DCAing also helps investors to not overexpose themselves, which is a common pitfall of newcomers to crypto.

How Can You Make Money Off of This Information?

I’m not entirely discounting dollar-cost-averaging, and it’s better to DCA than FOMO in at all-time highs. But a disciplined and data-based investor knows to be patient and wait for opportunities to come instead of chasing overvalued investments.

For investors who are looking for an equally simple strategy, I propose the following program:

  1. Identify market conditions: are things hot or not? Is your crypto in a bull market, overextended, or down from all-time lows?
  2. If the crypto of your choice is at or approaching all-time highs, wait for a significant (20%+ correction) then put in your capital.
  3. If the crypto of your choice is in a bear market (defined by a pullback of 20+ percent), and you’re committed to the investment long term, put all or most of your decided allocation in.
  4. Add capital every time it lowers your cost basis or every time it dips 20%.

That’s without looking at more advanced frameworks, but as I said, we’ll get into those later. And this framework isn’t just my suggestion, it’s mathematically backed to work (although it’s not investment advice).

A Contrarian Opinion

If you still disagree with me, here are the facts: in a bull market, blind luck beats DCAing, and buying low beats buying high. Historically, data backs this approach up.

So until I see you again, have fun, make money, and skip the auto-buys.

Jack Niewold

Founder, Crypto Pragmatist

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