Compared to other financial markets, the crypto market is like a roller coaster and often experiences dramatic price fluctuations. In previous articles of Hualihuawai, we often mentioned a DCA strategy, which is also one of the main investment strategies we adopt.
1. Basic Concepts of DCA
The English equivalent of DCA is Dollar Cost Averaging, which means the average cost method when directly translated. Many people also habitually call DCA "fixed investment", which is an orderly investment method that allows us to make steady progress step by step on some targets.
There are two basic components of DCA: periodic and quantitative.
The so-called regularity refers to a method of operating with a specific cycle, such as buying Bitcoin once a week or once a month. The so-called quantitative means operating with a specific amount, such as buying $10,000 of Bitcoin each time, or buying $20,000 of Bitcoin each time. Regularity and quantitative can be combined.
The main advantage of the DCA strategy is that it can minimize investment risks and is more suitable for investors with relatively low risk appetite, because the market is unpredictable and it is difficult for most investors to accurately buy at the lowest point all the time. By adopting the DCA approach, the impact of currency price fluctuations on returns will be evenly distributed, thereby reducing the amount of losses and reducing the psychological pressure or burden caused by currency price fluctuations on investors. Of course, the disadvantages of this approach are also obvious, because while reducing the amount of losses, the degree of returns will also be reduced.
You can't have your cake and eat it too. It all depends on what you care about most.
2. DCA Basic Strategy
Before planning to implement the DCA strategy, we first need to select the period according to our own position situation. For example, if we invest a total of $500,000 and make monthly fixed investments with 20 periods as an investment cycle, then the basic ideas you can operate are as follows (taking Bitcoin as an example):
The first is regular + quantitative
That is, divide $500,000 into 20 equal parts, and then choose the time to enter the market based on some comprehensive data indicators (or a position that suits your own psychological price), and insist on buying $25,000 worth of Bitcoin every month.
The second type is regular + irregular
Choose the time to enter the market based on some comprehensive data indicators (or a position that suits your own psychological price), and buy a minimum of $10,000 in Bitcoin every month. In the previous fixed investment stage (if it is a bottom range oscillation or a unilateral downward trend), you can increase and adjust the purchase amount as the price falls. In the later fixed investment stage (if it is a unilateral upward trend), you can reduce and adjust the purchase amount as the price rises.
The above two methods of fixed investment can be selected according to your actual situation. If you want to calculate the rate of return of fixed investment, you can use: (final price of token - harmonic mean of fixed investment token) / harmonic mean of fixed investment token.
Of course, the easiest way is to use Excel to list the average purchase cost of all fixed investments. As for the comprehensive indicators mentioned above, there have been some sorting and introductions in previous articles of Hualihuawai. Currently, the indicators with relatively high usage rates include Crypto Fear & Greed Index (Fear and Greed Index), Ahr999 (Bitcoin Hoarding Index), MVRV Z-Score, CBBI, etc. Interested friends can search historical articles to view them, so we will not repeat them here.
At the same time, one additional reminder is that according to our experience, if the price of the token rises first and then falls, or rises unilaterally during the fixed investment period, the rate of return of the fixed investment will be lower than that of a one-time investment. However, if the price of the token falls first and then rises, or falls unilaterally during the fixed investment period, the rate of return of the fixed investment will be higher than that of a one-time investment. Again, the market is unpredictable, and fixed investment is more suitable for investors with relatively low risk appetite.
3. Basic DCA Operations
The amount of funds invested is the main factor affecting DCA returns, while the frequency of investment is the main factor affecting DCA yield. This should be easy to understand. Within a specific cycle, the higher the frequency, the greater the impact of market fluctuations. Conversely, the lower the frequency, the smaller the impact of market fluctuations. Our previous operating habit is to invest in Bitcoin on a monthly basis, but you can invest on a weekly, biweekly, or other frequency according to your own situation.
As for the fixed investment operation, there are two options: automatic fixed investment and manual fixed investment.
Currently, many CEX (centralized exchanges) provide automatic fixed investment functions. For example, Binance has a fixed investment plan function module. You can set the fixed investment amount and execution period by hour/day/week/month, and then leave the rest to the platform (machine) to help you do it automatically on a regular basis and quantitative basis. As shown in the figure below.
Compared with automatic fixed investment, manual fixed investment is more suitable for investors with certain trading experience. It mainly performs variable-quantity operations. For example, according to the development of the market, you may decide to temporarily stop fixed investment, or through K-line and some data indicators, you believe that the market will start soon, then you can increase the investment amount or increase the investment frequency, etc.
Of course, whether it is automatic or manual fixed investment, a major premise of DCA is to invest in targets that you understand and are optimistic about. If your so-called fixed investment is for a junk coin that may return to zero at any time, then you will also bear the risk of losing all your principal.
This is not only true for the encryption field, but also for other financial fields. For example, if you have insisted on the DCA CSI 300 Index and the Nasdaq 100 Index in the past ten years, the final results of the two are different. A few days ago, I saw someone doing a simulation calculation online: starting from 2014, you have invested 1,000 yuan in the Nasdaq Index every month, so as of 2024, your cumulative investment capital is 121,000 yuan, and the final account asset balance is 309,701 yuan (annualized rate of 17.47%); as for using the same investment capital to invest in the CSI 300 Index every month in the past ten years, because the final result of the rate of return is negative, I will not post the details. If you are interested, you can search it online.
In short, remember what we have said many times before: the two most important basic principles of investment: protect your capital and don’t touch anything you don’t understand.
4. Summary
The market is difficult to predict. We cannot always grasp the best time in the market, nor can we always buy at the lowest point and sell at the highest point. The DCA strategy is actually more like a trading discipline, which can help you eliminate the influence of emotions (FOMO, FUD) to a certain extent.
The DCA strategy is a strategy that can span the bull-bear cycle. In a bull market, DCA will limit the explosive returns, so that you will not think that making money is as easy as breathing when you enter the market, and you will not go all-in at every turn, and you may end up being stuck at the peak of the bull market (or unwilling to come down and continue to be deeply stuck). In a bear market, DCA can give you the opportunity to accumulate preferred targets with lower chips, and these accumulations will bring you rich rewards once you wait patiently for a new bull market.
DCA is simply buying in batches, but the application strategies of DCA are different in different periods of bull and bear markets. In a bull market, you should focus on those high-momentum currencies (i.e., operating by analyzing the strength of recent price trends). In a bear market, you should focus on currencies with good fundamentals and resilience. Of course, our own DCA strategy will only be executed during a bear market, and we will not do any DCA buying operations during a bull market (we will only sell in batches according to timing and established goals).
On the other hand, if you only use a single DCA strategy for investment, you may miss some short-term opportunities in the bull market, such as the various MemeCoin opportunities that have continued this year. Depending on the target, a one-time investment will perform better in a strong bull market, but DCA can help you keep your heart calm, which depends on your choice. Or you can consider trying to balance, for example, you can use more than 80% of your positions for the DCA strategy, and less than 20% of your positions (divided into different numbers) for some one-time investment attempts.
The DCA strategy is more focused on accumulation rather than speculation, and may not be suitable for everyone. It needs to be determined according to the individual's capital size and risk preference. But if you want to participate in the crypto market, but have little time and energy to pay attention to and study this field, and you don't know much about various technical indicators and data indicators, then the simplest and least error-prone investment path is to invest in Bitcoin. In this way, if you stick to it steadily, you can basically be ahead of many ordinary investors (and speculators) in this field.
The DCA strategy is mainly a buying strategy. Many people say that the one who knows how to buy is the apprentice, and the one who knows how to sell is the master. As for the topic of how to sell reasonably, Huali Huawai’s previous articles have also sorted out some. Interested friends can search and review historical articles, or directly read Huali Huawai’s e-books to learn more. As shown in the figure below.
This is the end of our sharing of this issue. For more articles, please visit the homepage of Hualihuawai. The above content is only a personal point of view and analysis, which is only used for learning records and communication, and does not constitute any investment advice.
