What is DCA?
DCA (price average strategy) is a method of dividing the amount of capital to invest in a fixed and more frequent way over a long period.
This is a smart investment strategy. However, you must not confuse it with catching the bottom of an asset when it plummets to buy a good price.
DCA is really good if you predict the trend by the way market analysis. And of course the average price strategy must involve technical analysis or, in particular, tool indicators like MA, MACD, Bollinger bands, Elliott wave,…
Bitcoin problem using DCA
Now do a math problem about Bitcoin investment so you can imagine it easily.
Problem 1: Buy Bitcoin once with all assets
This is the case I think is mostly right for new market participants. For example, you have $ 10000 and buy all of that for bitcoin $ 8000 for example. You get 1.25 BTC.
Then Bitcoin gains / decreases you want to sell, we will have a profit / loss table with the sale price as follows:
This is a basic math problem. Next you use the average cost of your capital. See what it looks like. Here I will divide according to market movements so that you can consider the most comprehensive.
Problem 2: DCA is in a bear market
This is a problem that makes the DCA method really shine. Now, suppose that planning with the capital amount of $ 10000 will buy in installments. Divide the capital into 4 times, so use $ 2500 for each installment.
Proceed to buy bitcoin at 8000, 6000, 5000, 3000. So after 4 purchases so the number of Bitcoin you hold is 2.0625 BTC. Then BTC back to the upside, you will calculate the profit and loss at the price if sold as the table below:
You see, if as expected, the interest will be very terrible. As bitcoin fell, the brothers increased the number of holdings more than one-time purchases. The capital increased as the price of BTC increased with a total profit of ~ 1.5 when selling at $ 12000.
Problem 3: DCA in the sideways market (sideway)
When the market is sideways for a year, for example, prices move in a narrow range. You can buy bitcoins 4 times at the prices 8000, 7500, 7000, 6000. With these buy prices you will buy 0.877976 BTC.
You can see it's similar to the problem of one-time purchase with all capital.
The market may move sideways, up and down. But it ends where they begin for a long time. However, you will never be able to accurately predict where the market is heading.
If bitcoin were to move even lower, instead of higher, the average price would allow for even greater profits. This is the time to ensure you have a long-term profit, not just an instant.
Problem 4: DCA in the market is increasing
In this final problem, also divide $ 10000 capital into four installments for 5000, 6500, 7000, 8000. So after 4 purchases you have 1.55 BTC. When the price increases, you have a profit or loss in the following table:
This is a problem that DCA presents a bit poorly, at least in the short term. Bitcoin went higher and then continued higher. Therefore, average prices do not help you maximize your profits. This involves buying the whole thing in one go.
But unless you're making a short-term profit, this is a scenario that rarely happens in life. Bitcoin can evaporate, kkk. Therefore, if you are investing in the long term, it is advisable to spread your capital in transactions. Even if that means you have to pay more at a certain price.
The average price strategy is really good
In general, the average price strategy provides three main benefits that can yield better returns: Avoid fomo market, avoid market confusion, long-term investment thinking.
Because investors often fluctuate between fear and greed. They tend to make emotional trading decisions when the market reverses.
However, if you use DCA, you will buy it when people are selling fearlessly (green, red, kkk).
Noting a good price and setting yourself long profit. Markets tend to go up over time and the average price can help you realize that bear market is a great long term opportunity. Instead of fear of things.
Limitations of the DCA method
First, probably the most talked about, is the humble margins. Buying more often increases transaction costs. However, with exchanges that charge less to transact, this cost becomes more manageable.
Moreover, if you are investing long term, the fee will become very small compared to your overall portfolio because you are buying for long term investment purposes. Binance is my first choice because of its diverse ecosystems and reasonable fees.
Second, you can give up the profits that you could make if you invested in a one-time purchase and the assets you purchased increased.
However, the success of trading largely depends on determining the market correctly when predicting the short-term movement of an asset. This is done by good and famous analysts.