Two Ways to DCA

The topic of DCA, or “Dollar Cost-Averaging” comes up every time we weather another Bear Market. The point here is to continue to “average down” your investment during drops in price. When the price eventually recovers higher, then your “cost basis” is/was much lower in price, and is easier for you to show a profit. 

There is one main rule for this strategy to work: 

Price must ultimately go higher in time, during your lifetime, for you to accumulate value and utility from your investment. 

There is also only one “way” that this can work; you have to create a system and not rely upon your own intentions, which are designed to “protect” you during times of stress. This means that the very times where you should be loading up, are going to be the precise moments in time that you will pull away from fear. 

To me, the DCA strategy is for those who have a long time horizon for their investment, perhaps decades, where they can continue to “stack sats” during times of depressed prices. Do you fit this profile? If so, let’s discuss a couple of ways that you can optimize it. 

The Art of the DCA

There are two ways that you can “optimize” your DCA contributions – “time-based” or “technically-based.”  

With a time-based contribution, you’ll set up recurring buys at specific intervals. The power of this method is that most of the time, investors actually forget that the system is in place (which is why the “system” is important!) and when the gains come, they come as a surprise. You will make no attempt to “time” the market highs and lows, merely using regular, systematic contributions to your investment. 

With a technically-based contribution, you will only invest funds when you see a technical signal, and it’s best if you delegate responsibility of this trading to a bot which will have better execution during these times than your excuse of “oh, I was traveling.” Systems are going to normally select times of being “oversold” to add your contribution. 

Which is better? There’s little doubt that the time-based system will probably enter MORE of a contribution over time vs. the technical-based system, just because there are regular opportunities to invest vs. specific signals which may or may not come. However, the efficiency of of the technical system might be proven better over time since your contributions are coming at specific low points in the market. Find one that meets your profile best. 

The Elephant in the Room

Some might ask, “what is the point of dollar cost-averaging if we see every rally get destroyed?” True, the most recent bull went from a pandemic low of $3800 up to $69,000 in about 18 months…only to dump back down again. 

This goes with a question that I hear from many retail investors, “Hey, I’m a long-term HODL’er, however…..” which is a way of saying that they like the idea and simplicity of buy/hold, however they don’t like the feeling of holding an asset that continues to erase value. 

And we keep reading the posts from luminaries that emphatically state, “Bitcoin is going to ONE MILLION DOLLARS!” In order to get there, you definitely have to avoid getting shaken out on the way. 

But a bear is another way to “shake you out.” 

So what I would say is, “take some off on the next rally.” Don’t be afraid to take some profits. And always ALWAYS know where your “stop” lies, and follow it aggressively.