Bitcoin Strategy: DCA or Single Amount?
This is a question many investors have to ask themselves. Is it better to invest in Bitcoin in a single available amount or to prefer periodic purchases in fixed amounts? We will put forward several factors to determine what is more favorable according to the environment.
DCA principle vs. lump sum
First, we will define the principle of DCA. It is an English symbol, meaning “Average Dollar Price”. In French it is a average price in dollars. The principle is quite simple, you just need to do it periodic payments with fixed amounts. This strategy avoids the headache of finding the perfect entry.
And on the other hand, the principle single quantity to make a one-time payment of the already existing amount.
To illustrate this more clearly, here is the difference between the two strategies. In blue = unit amount and in green = DCA.
In both cases, there are advantages and disadvantages, and a good time for one and the other. Therefore, we will emphasize two principles.
Advantages and disadvantages of DCA
Here is a list of benefits associated with the DCA strategy:
- It takes the stress out of finding the perfect entry
- Minimize the impact of volatility against a larger amount
- DCA offers the opportunity to start with small amounts
- avoid FOMO which can become a source of emotions (fear of abduction).
- Automating payments allows you to be disciplined and avoid emotional stress
- A favored strategy during a bear market
In another registry are these Disadvantages of DCA :
- Since it generates more transactions, it can be more expensive.
- DCA does not completely reduce the risk, but it helps to minimize the risk of incorrect entry.
- The principle of periodic payments can complicate the task.
- De-risking with DCA can affect returns relative to a lump sum over a long period of time.
Advantages of lump sum
As for the advantages of lump sum, it can be said that in the long run the returns can be more attractive than DCA. This result assumes that market upswings are longer and more persistent than market downswings. Therefore, a single amount may turn out to yield better returns. As bitcoin follows the same cyclicality as the US stock market indices during growth acceleration, we can look at DCA and 100% equity portfolio research for a single amount.
It’s also important to learn the factors that influence whether Bitcoin can pay off.
Here is a study of various startup portfolios. We can see that the single sum outperforms DCA by 66%, which is not insignificant.
But since it’s not all about return, it’s also about risk, so you need to compare the risk of an amount with DCA. This is to see if higher returns come with higher risk. A sharp ratio is used here.
Sharp ratio = (Return on portfolio of assets – rate of return on risk-free investment) / standard deviation
Finally, we can see that the return is higher but the risk is higher than DCA.
Apart from the return, the lump sum also allows less maneuvering to execute the strategy.
Disadvantages of single sum
The main drawback remains the fact that if the timing is not right, a single amount of investment can face heavier losses. For example, investing an amount at the top of a bullrun can be painful because drawdowns are high. It can also cause a wave of emotions to overcome. That’s why it’s always important to invest not only the money you don’t need, but also the money you’re willing to lose.
Here is an overview of possible bitcoin reductions:
It should be remembered that bitcoin remains a risky asset, as losses from the peak can reach -90% in some cases.
A question about the timing of Bitcoin
Although the DCA strategy is based on the principle of not determining the entry into the transaction. However, it should be noted that it has better performances in certain environments and less good performances in others.
In the chart below, we can see an example of the performance of the S&P500, periods when the DCA outperformed the lump sum strategy.
As accelerations in economic growth are favorable for bitcoin’s performance as well as stock indices, we can look at research on the topic at the stock index level.
We can clearly see that the DCA strategy is more profitable during bear markets or ranges. And single sum offers better returns than DCA during bull market periods.
If we want to optimize bitcoin returns, we need to use DCA as a strategy protection during a bear market and as a lump sum strategy more cyclical during bullruns.
DCA during an economic downturn
Bitcoin is fueled by various factors such as bull cycles, monetary policy, sentiment, whales, halvings, the dollar, bitcoin volatility. Because it is a considered asset”on risk” (risky), this will vary by asset type.
In this case, it is good to look at periods of peak growth and reversal zones for a leading economic indicator.
It appears that bear market periods often coincide with bear market periods.
We can also highlight these periods of slowdown for bitcoin with the chart below:
Since it is a speculative asset, a more abundant liquidity environment is an incentive for bitcoin to fluctuate. Moreover, we can also see that this also changes due to the Fed’s monetary policy. Bitcoin is very sensitive to liquidity injection or withdrawal.
Finally, if we draw a portrait over a longer period of time, we can see that investing in a single amount outperforms DCA over the long term. Bitcoin is a highly volatile asset in one way or another. It can fall 70-80%, but its high volatility has made investing in one sum superior to DCA over a longer period of time.
Either way, there is no right or way to do it, just the right conditions to do it.
Growth acceleration periods for Bitcoin
When it comes to the ongoing bitcoin bullrun, it’s convenient to use a single amount. Bullruns are more common when we enter a period of accelerating economic growth. This is for the simple and valid reason that “risky” assets are generally favorable during periods of acceleration.
Current situation for Bitcoin
Until then, we are still in a bear market for bitcoin. Generally, bear market cycles can last between 200 and 400 days on average. Therefore, knowing that the current conditions related to the economic environment have not improved, it is likely to continue the same path in 2023. We start 2023 with fairly tight monetary policy and subdued growth. Therefore, the recession will continue until proven otherwise. And while this is the case, as discussed above, DCA seems to be more beneficial for those who don’t want to miss out on action and don’t invest a lump sum.
If we want to maximize returns. When economic growth accelerates, it is better to use a single amount during the boom. It aims to generate maximum high returns over a longer period of time. Conversely, when conditions are less favorable, such as an economic downturn, it is better to use DCA. This allows for better risk management during more volatile periods, as the price is diluted by small amounts under multiple inputs with varying costs.
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After working for a Canadian bank for 7 years, including 5 years as an analyst in portfolio management, I left to devote myself entirely to financial markets. My goal here is to analyze financial market data in various aspects, including macro analysis, technical analysis, cross-market analysis…