Is Crypto DCA a really sensible crypto trading strategy? There are countless influencers encouraging listeners to Dollar Cost Average their crypto investments and never sell, but is it really sound advice or could it send you broke?
Generally speaking, as a retail shopper, there is nothing better than securing a ‘bargain’. Whether it’s the latest pair of brand name shoes, a used vehicle or even a well negotiated price on a house. The desire to pay anything other than full price appeals to a deep-seated feeling of victory which resides in all of us at some level.
Unfortunately, bargain hunting (buying more when your favourite crypto declines) will usually work against you in the field of trading. This is especially investing in cryptocurrencies as I will show you in this post.
Yet you continue to see endless pundit’s spruiking Crypto DCA investing on social forums or other personal communications. However, you have also had to mindful that this majority of traders/investors will lose money over the long term, so remain sceptical and don’t follow blindly.
Well, essentially, it is the practice of the regular periodic purchasing of a token as the price continue to fall in a downtrend thereby, lowering or “averaging out” your overall purchase price. Remember we are satisfied when we get a bargain so, while this may seem “logical”, there is a saying within the professional trading world that “losers average losers” and this article will demonstrate why this is true.
Here is a diagram that illustrates how Crypto CDA works. It assumes on the first of every month you invest $1000 into a hypothetical Cryptocurrency over time, hoping that over time you will build your wealth efficiently by buying more when the price is low and less when the price is high.
If we invested $1,000 each month and purchased as many coins as we could each month and held those coins the table below illustrates the outcome:
In this example Crypto DCA lost money over the calculation period because we invested $14,000 in total, but at the end of the period our holdings were only worth $11,365.
The one HUGE Problem with Crypto DCA
Typically, those promoting DCA Crypto investing as a strategy have very little or no understanding of risk management, money management, bear market behaviours and trend recognition. The typical story they try to sell you is that if a token that was trading at $100 and is now $75, then it must be great buying. If it continues to fall to $50 then it is cheap, and at $20 it’s an absolute screaming bargain. This is because each purchase of tokens, has been at a lower price therefore, the ‘average’ price is much lower than if the whole lot was purchased initially, at the high price.
The big problem is that these tokens can and do go to zero!!
There are over 20,000 tokens available at the time of writing this article, with many of them basically ‘a solution looking for a problem to solve’ or simply just a straight-up scam. Think of the success rate in business start-ups, maybe 2-3%….do you think over 20,000 crypto projects will all be successful?
If you dollar cost average into a cryptocurrency token that goes to zero then you are just throwing good money after bad and losing all the way down. Plus even if you ONLY do dollar cost averaging in Bitcoin you still have to face HUGE losses through the inevitable and brutal bear markets. As shown by the image below there have been multiple Bitcoin bear markets with over 60% declines. Dollar cost averaging crypto is hugely risky because of how much money you lose on the way down in a bear market!
Bear markets in equities often see ‘market darlings’ wiped out—their share prices reduced to near zero or zero and eventual removal from the exchanges. This is no different in the crypto world and anyone holding these tokens can end up with a worthless asset, despite having bought it when prices were ‘cheap’. Not such a great ‘bargain’ after all!!!
DCA is a theory built on the blind self-belief that markets will always rise and token prices will always recover. This does not always happen, and this practice continues to cost a lot of people a lot of money as they blindly throw good money after bad thinking they are buying a bargain.
Below is a table of the Top 20 tokens at the end of 2017 and their prices today, clearly this shows that you would have to be “very very lucky” to have picked the “THREE” tokens only that are still ahead of their 2017 value (BTC, ETH & TRX).
I posted this table across socials and had numerous people telling me that had you dollar cost averaged since then you would be much more ahead. While I knew that answer was unlikely to be true it got me thinking, could I test it, as we know as systematic traders, the data doesn’t lie.
See, the issue with a bear market is that no one can ever know where and when it will end and which tokens if any will recover to previous prices. Despite the urgings of “advisers” with a vested interest in encouraging people to buy in falling markets (ie large token holders), prices can and will be forced lower and lower by the sheer weight of sellers wanting to get out at any price. Further, there are countless examples of “gurus” and other “so-called experts” attempting to pick bottoms of the markets who, become remarkably silent when prices continue further and further into the abyss.
Bear markets are very volatile with some of the strongest positive moves actually occurring in bear markets, they have everyone convinced the worst is over only to drop again as the sellers regain control. This may happen several times with various experts calling for the bottom each time a bottom may ‘appears’ to be in. Unfortunately, market bottoms are not known for a long time after they have occurred, when we can all look back say with authority when it occurred!
Those who average down using the Crypto DCA strategy during these times will be punished by the market, many losing substantial sums of money in the process. Some may make it out alive, but most won’t.
To test the theory of dollar cost averaging, we undertook an extensive backtest in Amibroker by purchasing $100 a month on each of the Top 20 tokens from Sept 2017 (Binance data start date), as well as testing the dollar cost average start date at each July thereafter. We have compared the results to a baseline, which is ‘simply saving $100 a month’, ie. just putting it in the bank (no interest accrued). Furthermore, we have also shown the results of our “weekly” trendfollowing system. Yes, a weekly system, where you only need to place trades once a week on a Sunday. We started this weekly system with only “$1000” and have not added any funds (compared to the $100 a month for the dollar cost average test). The results are pretty clear!
A quick summary of the results shows that:
- Only 6 tokens DCA’d since 2017 are ahead of the baseline of saving money – an average of 2x savings.
- Only 6 tokens DCA’d since 2018 are ahead of the baseline of saving money – an average of 2.4x savings.
- Only 7 tokens DCA’d since 2019 are ahead of the baseline of saving money – an average of 1.6x savings.
- Only 4 tokens DCA’d since 2017 are ahead of the baseline of saving money – with average of 0.76x savings.
- Only 3 tokens are significantly above the baseline of saving $100 a month in a savings account (ADA, ETC and ETH).
As stated earlier you would have to have been extremely ‘lucky’ to have picked these three tokens in isolation and then have had the psychological make-up to have held through the market turmoil since 2017/2018. Therefore, since picking the top 3 tokens is nearly impossible a more common approach promoted by the “guru’s” is that you dollar cost average across a basket of tokens, say, ‘the top 20 tokens’. A weighted average of dollar cost averaging into the Top 20 tokens is shown below.
Now although there are three scenarios where you would still be ahead of the baseline, a few comments:
- Only three scenarios are marginally better than saving.
- There is no guarantee that if you started dollar cost averaging in 2020/2021 that you could recover your current drawdowns.
- More importantly – a compound annual return of between 2.8% to 7.6% is a far cry from what the pundits will advise you will achieve if you are to dollar cost average in the crypto markets.
The DCA Crypto Strategy Compared to Crypto Trend Trading
Trading with and in the direction of the trend is vital to success in any trading or investing activity. Reduced to its simplest form, trend trading can be defined as buying in uptrends and selling in downtrends. Yet this simple and straightforward approach eludes many as they either strive to apply too many technical indicators, employ the often-flawed use of fundamental analysis, or simply have no idea what they are doing, deferring all their financial decisions to a fake guru or overnight online ‘expert’, who has as much idea about trading and investing in the markets as the average turkey.
A systematic approach to averaging into the price of a cryptocurrency (Using the DCA Crypto Strategy) during a bull market when the general trend is up may make some sense (provided you backtest if properly and you have an exit rule to get you out when the bull market is finished). But it is a foolhardy approach over the longer term or in a bear market when prices are getting smashed because, as the analysis above shows, you loose large amounts of money and end up behind.
Despite what the analysis above shows, you still find many ‘experts’ advising to dollar cost average crypto, and buy buy the dip. But as you can see in the Bitcoin price chart above, often the dips in the cryptocurrency market keep on dipping way further than you expect!
For many psychological reasons, people are happy to listen to the advice of others when it comes to their financial matters. This may work well in raging bull markets, but not so well in falling markets because the individual does not have “an exit strategy”. All the fake gurus appear like heros when prices are rising, but not many are willing to take responsibility when prices are falling. Listening to advice on social media is throwing away your independence, freedom and propensity to think and act for yourself—it is a blind philosophy and a flawed strategy.
Systematic Trading Is a Much Better Strategy Than Crypto DCA
Systematic traders and those with a trading plan know when it is time to exit trades either on initial stop losses, trailing stops or profit targets. They are able to exit trades as and when required and know not to re-enter the market until their system conditions are met. In this way they do not hold onto losing positions, and are never drawn into averaging down. Using the same data applied above over the same timeframes the following table show the results on our weekly trend following system with “only” $1000 starting capital and no additional funds employed, compared to the significant investment of DCA.
The results show a clear advantage of a systematic trendfollowing approach to the market, with trading only one day a week (Which only takes 10-20 minutes)!!
At the time of writing, the Crypto DCA strategy would be in a 60% drawdown over the last 12 months, however our trendfollowing model is up 4%!
This difference is hugely material when considering the base portfolio value heading into the next bull run, not to mention your psychological health!
Conclusion on The DCA Crypto Strategy and Your Next Steps
Failing to get out of trades, dollar cost averaging down into losing positions and hanging on to positions in a bear market not only erodes your physical capital but also your emotional and psychological capital very quickly.
It is much better to get out of the market when your stops are hit or according to the rules of your system than to stay locked into losing positions. Averaging down only further compounds the emotional attachment you have to every move the market makes AND it loses you a ton of money!
HODLING, Diamond Hands, Buying the dip or just plain buy and hold are just not sensible crypto trading strategies when compared to systematic trend following!
If you have a system which exits the market you can relax on the sidelines and remain detached from the market. You won’t have to worry every day about what the market is doing or how it could hurt you. If your portfolio isn’t holding onto any positions, it really doesn’t matter what the market does, you remain agnostic.
Instead, you can relax and wait patiently to get back into the market when the next bull move starts with much greater capital which you preserved by sitting on the sidelines (or by shorting the market). The few investors who have managed to consistently dollar cost average crypto that have actually been able to hold on, are nervous, tense, stressed-out and watching the market’s every move with huge anxiety.
Eventually most people reach a point where they are completely wrecked. When market conditions change and buying opportunities once again present themselves, these people are so psychologically and financially ruined they aren’t able to participate.
The emotional roller-coaster associated with dollar cost averaging crypto or buy and holding is extremely taxing. Feelings of euphoria when the market makes a brief rally are quickly annihilated by an overwhelming fear that occurs when more money is lost. It is very hard to make clear and objective decisions when you are consumed by fear.
A far better strategy is to use a systematic trend following trading strategy, with strict, objective and thoroughly backtested entry and exit rules, risk management and money management. Good trading systems don’t average down into a losing position. A crypto trading system will wait patiently for the right move, get in and ride the trend, then take profits and wait patiently until the time comes to get back into the market.
Avoiding the mistakes of strategies like dollar cost averaging crypto requires proper education. You need to avoid the behaviours of 95% of traders and investors who do not have success and follow proven trading strategies that actually work. It is simply not good enough to make “judgement calls” based on a social media advice or advice of overnight guru’s.
Education coupled with a disciplined and consistent approach to your trading will greatly enhance your ability to operate in a methodical, independent manner. Taking responsibility for your trading and investing decisions and actions will lift you beyond the realm of punter and have you well on the way to taking a professional and businesslike approach to your trading.
Become your own master, stand aside from the noise and trade with confidence using a portfolio of proven crypto trading systems that actually work – Join the Crypto Success System Today!!