Bitcoin strategy: DCA or single amount?

Many investors have to ask themselves this question. Is it better to invest in bitcoin for a single available amount or prefer regular purchases in fixed amounts? We will propose several factors to determine what remains most beneficial depending on the environment.

The DCA principle vs. single amount

First we will determine the principle of the DCA. It’s an English symbol that means “Average Dollar Cost”. In French it is a average cost in dollars. The principle is pretty simple, you just have to do it regular payments in fixed amounts. This strategy avoids the headache of finding the perfect listing.

And on the other hand the principle of single amount is the one-off payment of the amount already available.

To illustrate this more vividly, here is the difference between the two strategies. In blue = single amount and in green = DCA.

In both cases there are pros and cons, but also a favorable timing for one and the other. For this reason we will emphasize the two principles.

The pros and cons of DCA

Here is a list of benefits related to the DCA strategy:

  • It allows you to not stress yourself to find the perfect entrance
  • Minimize the impact of volatility versus a larger single amount
  • The DCA offers the opportunity to start with small amounts
  • Avoid that FOMO (fear of missing out) which can become a source of emotions
  • Automating payments allows you to be disciplined and avoid emotional stress
  • A favorite strategy during a bear market

In another register, here are those Disadvantages of DCA :

  • Since this generates more transactions, it can become more expensive.
  • The DCA does not completely reduce the risk, but it does help to minimize the risk of an incorrect entry.
  • The principle of periodic payment can complicate the task.
  • Reducing risk with the DCA can have a long-term impact on the return relative to the individual amount.

The advantages of the one-time payment

As for the benefits of the single amount, the return can be more attractive over the long term than with the DCA. This conclusion assumes that market moves up are longer and more sustained than market moves down. Therefore, the single amount may turn out to offer a better return. As Bitcoin follows the same cyclicality as US stock market indices during growth acceleration, we can look at the studies done on a 100% stock portfolio for the DCA and the single total.

It is also important to examine the factors that can affect Bitcoin.

Here is the study made on the different starting portfolios. We can see that the single amount beats the DCA 66% of the time, which is not negligible.

However, since it is not just about returns, but also about risk, you also have to compare the risk of the individual sum with the DCA. This is to find out whether the higher return is accompanied by a higher risk. The Sharp Ratio is used here.

The sharp relationship = (return on an asset portfolio – return on a risk-free investment) / standard deviation

Finally, we can see that the return is higher but also the risk is higher for the single amount than the DCA.

Beyond the return, the single amount also allows for less maneuvering when executing the strategy.

The disadvantages of the single amount

The main disadvantage remains the fact that investing a single amount can result in larger losses if the timing is not right. For example, it can be painful to invest a single sum at the peak of a bull run because drawdowns are high. It can also trigger a surge of emotions to deal with. That’s why it’s always important to only invest money that you don’t need but are willing to lose.

Here is an overview of the possible drawdown on Bitcoin:

bitcoin, dca, power
Source: Media

As losses from a peak can be as high as -90% in some cases, it is important to remember that Bitcoin remains a risky asset.

The question of timing for Bitcoin

Although the DCA strategy is based on the principle of not having to determine entry into an operation. However, it should be noted that it performs better in certain environments and less well in other environments.

Here is an example of the S&P500 performance on the chart below, we can see the periods when the DCA outperforms the single amount strategy.

Since accelerations in economic growth are favorable for the performance of Bitcoin, but also for stock market indices, we can look at studies that have been conducted on this topic at the level of stock market indices.

We can clearly see that the DCA strategy is much more beneficial in bear markets or ranges. And the single amount offers better returns than the DCA in times of rising markets.

If we want to optimize Bitcoin’s return, we should use the DCA more as a strategy defensively during a bear market and the single amount strategy as more cyclical during bull runs.

DCA during an economic downturn

Bitcoin is boosted by various factors like growth cycles, monetary policy, sentiment, whales, halving, dollar variation of bitcoin. As it is a considered asset “risk” (risky), it will vary depending on this type of asset.

In this case, it is good to look at the leading indicator growth spikes and reversal zones.

It can be seen that periods of deceleration mostly correspond to periods of bear markets.

bitcoin, dca, power
Source: Conference Committee

We can also highlight these slowdown periods for Bitcoin with the chart below:

Because it is a speculative asset, a richer liquidity environment is a stimulus to Bitcoin’s volatility. Furthermore, we can also see that it also varies depending on the monetary policy of the Fed. Bitcoin is very sensitive to liquidity injections or withdrawals.

Last but not least, if we take a portrait over a longer period of time, we can see that investing a single amount outperforms the DCA in the long run. Bitcoin is an asset that exhibits high volatility in one way or another. It can fall 70-80%, but its high upside volatility has seen single-total investments outperform DCA for an extended period of time.

In any case, there is no right or way to do it, only favorable conditions for it.

Bitcoin Growth Acceleration Cycles

In view of an ongoing bitcoin bull run, it is favorable to use the single amount. Bull runs are more likely to occur when we enter a cycle of accelerating economic growth. This is for the simple and good reason that ‘risk’ assets are generally cheap during acceleration cycles.

The current situation for Bitcoin

Until then, we are still in a bear market for Bitcoin. In general, bear market cycles can last anywhere from 200 to 400 days on average. Therefore, it is likely to continue on the same path for 2023, knowing that the current conditions regarding the economic environment are not improving. We start 2023 with a quite restrictive monetary policy and weakening growth. Therefore, the downturn is likely to continue until proven otherwise. And while that’s the case, as discussed above, the DCA seems to be more useful for those who don’t want to miss the move and don’t want to invest a one-time sum.

Conclusion

If we want to maximize the possibilities of return. It is better to use the single amount during an uptrend during an acceleration in economic growth. This serves the purpose of benefiting from maximum higher returns over a longer period of time. And vice versa when conditions are less favorable, such as B. during an economic downturn, it is better to use DCA. It allows for better risk management during more volatile times as multiple entries at different costs dilute the price with small sums.

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Laetitia Bonaventure avatar
Laetitia Bonaventura

After working for a Canadian bank for 7 years, including 5 years in a portfolio management team as an analyst, I left my job to devote myself full-time to the financial markets. My goal here is to democratize financial market information to the Cointribune audience on various aspects including macro analysis, technical analysis, intermarket analysis…

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