Dollar Cost Averaging - Bear Market Silver Lining

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Learn Crypto Blog Learn Crypto Blog
Learn Crypto Sep 08 · 5 min read
  • Dollar Cost Averaging explained
  • Why Bear Markets are best for DCA 
  • The importance of DCA Journals
  • Practical considerations for DCA

Bitcoin price has been ranging ominously for over eight weeks between the crucial support level of $30k and the resistance of $40k. Further declines are a real possibility into the $20k range, signalling a bear market, but all is not doom and gloom. If you believe in crypto’s long term viability, but don’t have the stomach for playing the short game, this is the perfect time to be dollar cost averaging.

What is dollar cost averaging?

Dollar Cost Averaging - or DCA for short - refers to repeat purchasing of an investable asset, in our case bitcoin or some other crypto, in order to attain an average price spread over consistent repeat purchases, avoiding the difficulties of timing the market for a single purchase.

DCA is especially suited to anything with high volatility, which is why it is particularly relevant for crypto. 

Crypto’s volatility is in large part because the market is driven by narrative; outlined elsewhere in the Learn Crypto blog. Watching the price gyrate each day, and trying to second-guess where that narrative might shift can be a mentally exhausting exercise. 

Far better to get a real sense of the fundamentals of whichever cryptocurrency you feel is worth investing in, doing enough research to satisfy yourself that, on balance, investing will be a profitable decision. You can then plan out recurring purchases, ignore the inherent short-term volatility, and check back in at sensible intervals to see how things are going, saving yourself a lot of sleepless nights.

DCA & Bear Markets

With crypto down 50% from the ATHs registered earlier in 2021, DCA is a hot topic, simply because it works best in bear markets. Your investment thesis must assume a full recovery - otherwise why invest at all - so the ability to accrue a holding at an average price significantly below previous ATHs (All Time Highs) is attractive.

Of course there is no guarantee that the market will turn, but what DCA does is just remove the stress that everyday volatility involves. The structure of DCA gives you a simple path to follow amid all the distractions. Once a week or month you buy the same amount, at the same time and importantly you make a record in a DCA Journal.

The importance of a DCA Journal

Dollar Cost Averaging doesn’t remove stress entirely. Buying week-on-week at a constantly declining price can be painful, but you can take comfort from having a clear methodology, no matter how simple.

Alongside that methodology, you need to keep yourself honest; which means recording everything in a DCA Journal.

The importance of recording each purchase is to present a clear appraisal of how your investment approach is working out. Just because you are being structured doesn’t mean there is no risk, but by laying everything out you can quantify how far above or below break-even you are straying and also apply some parameters for how much to invest within the structure of recurring purchases.

You can purchase daily, weekly, monthly or at any other interval; what is important is that you stick to it rigidly, and ideally invest a consistent amount of your discretionary income, which you can afford to lose. 

The importance of consistency is simply that it removes you from trying to second-guess and play the market. If you believe in your trading abilities, take that route. DCA is for those that don’t have the time, patience and experience (and you need lots of all three) to trade successfully.

A good DCA Journal should record details for every purchase and present a clear summary from that overall data:

  • Date of purchase
  • Crypto purchased
  • Amount invested
  • Fee
  • Net Investment
  • Amount of Crypto Purchased
  • P&L Nominal
  • P&L Percentage
  • Totals for each

Your summary should then enable you to plug in the current price and provide:

  • Total Invested
  • Total Value
  • P&L
  • Amount held
  • Average Price Paid

Practical aspects of DCA

DCA is exactly the sort of commitment that might feature among New Year’s Resolutions. Unfortunately, most resolutions aren’t kept. Sometimes that failure is because of a lack of motivation - especially so when a significant effort is required - but it can also be simply because of a lack of organisation.

If you are going to DCA you need to organise yourself to make the purchase as per your plan. Which means committing the funds and logging on to the exchange to place the trade.

If you think your likely to forget or be distracted from your commitment to DCA you an always set up a recurring purchase to take that strain for you. Most user friendly exchanges offer that service, and once set-up they will just run in the background, appearing on your bank statement.

There is a downside to recurring payments, which is the cost of making them. Coinbase charge €1.99 per transaction while charge €1.50 so if you were only spending €20, the fees would account for 10%, which is a significant amount.

There is some mitigation in respect of Coinbase as they are offering a promotion for recurring payments giving you $10 at the fourth and eighth recurring purchase. That bonus will count against your fees, but it is a crucial element of your DCA Journal to understand exactly what the process is costing you, as that will impact your P&L.

You might view the cost as a necessary evil to ensure you see the process through; you can always deposit once and manually set your trades, the choice is yours.

It is also worth understanding the slight variation in how recurring purchases work, which is another reason to maintain a DCA Journal. One key aspect is whether the fee is on top of your desired recurring purchase amount, or part of it. The former will mean you spend more but accrue more, while the latter means your overall outlay is lower, but you won’t be acquiring as much crypto as you might have intended.

How long to DCA?

As part of the structured approach to Dollar Cost Averaging you should have in mind how long you want to invest for. You might feel that you never want to sell, which is fine, but most people will have some number in their head, either in terms of profit or loss.

This does bring you back to the subjectivity and uncertainty that DCA helps to avoid, because there is no way of knowing how long a Bear Market might be. If a downturn is prolonged you may start feeling like you are throwing good money after bad, so you can pause payments or even sell on a recurring basis. 

DCA doesn’t have to remain simple, but should always start that way. Think of it like the rails at a bowling alley, ensuring the ball hits the pins. They remove both the uncertainty and the frustration, but when you’ve practised enough with them, you’ll be ready to bowl with the pros.