I know, I know. Dollar Cost Averaging is a popular idea amongst fellow pubbers. Our fearless leader @Peter actively dollar cost averages. Before I get burn to a crisp for even suggesting this idea, I do want to point out I created a DCA bot (more like a fork of Gekko) that will automatically DCA for you in any coin available on Coinbase Pro or Binance (and a few other exchanges). Here’s a link to that post:
I know Coinbase already lets you DCA, but they charge you a fee. This bot uses limit orders on Coinbase Pro so you are getting the BBO (Best Bid and Offer) from the order book. Combining the two will get you the best performance in your investment of choice overtime. I will also be updating the bot to actually record the price of each trade in a spreadsheet and track your dollar averaged price (give me a week, it’s easy but I don’t want to overpromise).
Now, the topic at hand: (Scroll to the end for TLDR)
Dollar cost average is simply buying a set amount at a set schedule because we don’t know where the bottom is (and generally don’t care). But let’s say for a second we do know where the bottom. There is no way dollar cost averaging will perform better! Let’s use historical data for Bitcoin as example. The previous completed bull/bear cycle was from July 2013 - November 2013 (bull portion) and December 2013 to October 2015 (bear portion). Most people that DCA during the bear portion would have started around March 2014, as Bitcoin has already dropped more than 60% from ATH. I will use the monthly close price for BTC/USD on Bitstamp (they have the most historical data) as the price point that a person would DCA in (BTW, BTC looks great in the monthly chart).
Let’s say you invest $100 a month from March 2014 to October 2015 (we can assume you continue after October, but for this post, we will just compare performance of the total amount from that duration to buying the bottom).
This is how much Bitcoins you would have bought:
March 2014 - 0.21 BTC
April 2014 - 0.22 BTC
May 2014 - 0.15 BTC
June 2014 - 0.15 BTC
July 2014 - 0.17 BTC
August 2014 - 0.2 BTC
September 2014 - 0.25 BTC
October 2014 - 0.29 BTC
November 2014 - 0.26 BTC
December 2014 - 0.31 BTC
Jan 2015 - 0.46 BTC
Feb 2015 - 0.39 BTC
Mar 2015 - 0.40 BTC
Apr 2015 - 0.42 BTC
May 2015 - 0.43 BTC
Jun 2015 - 0.38 BTC
Jul 2015 - 0.35 BTC
Aug 2015 - 0.43 BTC
Sep 2015 - 0.42 BTC
Oct 2015 - 0.32 BTC
Total cost: $2,000
Total Bitcoins purchased: 6.21 (Most of us wish we have that many now!)
If you bought at the bottom in January 14, 2015, when Bitcoin closed at $171.41, you would have almost double the amount of Bitcoins, at 11.66 BTC.
There’s no way we can absolutely predict the bottom, but there are tools that will help. So instead of dollar cost averaging every month, we will use the 200 day Simple Moving Average as a guideline. The 200 day Simple Moving Average is just the average price of an asset from the last 200 days. It always looks back at the last 200 days, so each day’s close is add to the calculation and the 201st day is removed. On a chart, it will draw a trend line, like this:
As you can see, the blue line is above all the current prices, because it included the prices of November, when we were still above $6k (and the perma-bulls at that point thought that was the bottom). So here’s how to use just the Simple Moving Average as a basic strategy over DCA:
Just buy (the entire amount that you would use to DCA, so in this example $2,000) when the price goes back above the 200 day Simple Moving Average. In our historical example, it would have been on June 29, 2015.
You might noticed the price actually went back below the 200 day SMA in late August 2015 before beginning the new bull rally. That’s just a false start and honestly, I don’t know if it will happen when our current bear cycle finally ends. So assuming we don’t know that and buy on June 29, our $2,000 would have netted 7.81 Bitcoins, or 1.6 Bitcoins more than DCA. You might argue that following this strategy, you can’t use $2,000 because it was 3 - 4 months earlier than when I said the bear cycle ended. Feel free to use $1,600 to calculate (and then lop off the last few months in the DCA calculation) and you will still see this strategy still performs better than DCA.
Now, to the crystal ball that you guys are looking for. Buying the bottom. There’s another strategy called the Mayer Multiple. I’m not going to explain that in details here (go to https://www.mayermultiple.com for the explanation and go to the indicator I built on TradingView to see it in action). Right now, we are at 0.51 Mayer Multiple. During the last bear cycle, we reached 0.39 Mayer Multiple. I would need Bitcoin to get near that number before I go all in. The worst case scenario where that never happens, I will then go all in when the price is greater than 200 SMA. Remember, that still performs better than DCA.
There’s another reason to not use DCA. Bitcoin and all crypto-assets are extremely volatile. That means they have to drop massively (at least 85%, higher for alts) from their ATH to begin a new cycle. DCA and people that always say “Buy the dip” are just prolonging the bear market cycle, not letting Bitcoin drop the 85% or higher that is needed to end the bear cycle. I hope after reading this, you all will stop buying the dip, let Bitcoin (and the alts) fall to the price it needs to fall to, and we all buy in at whatever price that is the bottom or the end of the bear cycle and ride it to the moon or the next ATH (BTW, that is starting at 2.4x Mayer Multiple, I hate when ppl say moon but doesn’t define when)!
DCA performs worse than buying at the end of a bear cycle. By buying at the end of a bear cycle, you are saved from the pain and anguish of averaging down.
- Use the 200 day SMA to determine buy point instead of DCA (it performs better than DCA).
- Use Mayer Multiple to buy at the lowest price, if that doesn’t happen, follow step 1.
- Stop buying the dip and catching knives or averaging down.
- Spread the word so we can end the bear cycle sooner.