A DCA STRATEGY

With markets dropping hard and no end in sight, it’s important to have a good strategy for trading crypto. At this point in time, we do not know how low bitcoin and altcoins will go, yet outlooks are extremely bearish and we still want to reap the benefits of a good investment strategy both in the short term and the long term. 

For the short term the answer is futures, no argument there. Get Filthy Rich Premium and trade away. 

For the long term, I will share what I expect to be a useful DCA strategy in this blog. It’s easy to understand and replicate (at your own risk). Let’s start with the BTCUSDT daily chart. From the All-Time-High (ATH) in november 2021, we see nothing but decline and a number of small rallies. Also note the covid low in 2020 where BTC was trading in the $3k range (click on the picture for a full chart).

This article assumes that the downtrend will continue (as explained here) and based on the assumption that this bear market is temporary, this article explains how to make this bear market work to your advantage, let’s get into it. 

What’s DCA?

DCA means dollar-cost-averaging and it is the process of buying an asset at different prices over time, resulting in a reduced average entry price. When prices come down and we’re spot trading with a DCA strategy, we are looking to maximize returns and to minimize risk. Minimal risk requires buying at the lowest possible (average) price.

Example 1: Buy 1 COINX at $10 and 1 COINX at $5, my investment is $15 and my average entry price would be $7,50

Example 2: Buy 1 COINX at $10 and 2 COINX at $5, my investment is $20 and my average entry price would be $6,67

The average price is much better in the second example, but here’s the catch. Most of us can’t afford to keep doubling down, so we need to start our strategy at the right moment. There’s an upside to this as well. 

Example 1: Sell 3 COINX at $20, the value would be $60 and my profit would be $45 (200%).

Example 2: Sell 4 COINX at $20, the value would be $80 and my profit would be $60 (300%).

 This illustrates the function of “doubling down” as opposed to simply “buying more”. However, be aware that may have to wait some time before you see nice returns. Invest only money that you won’t need during this time. Any money invested will be tied up and if you take it out for any reason other than taking profit, your investment will have failed.

 

Which coins to DCA?

To determine which coins are suitable for our DCA strategy, let’s pick only coins that survived the 2018 crash, as we can consider those to be somewhat ‘resilient’ and ‘mature’. There have been a number of popular coins that never recovered from the 2018 crash and the same will be true for the 2022 crash; what’s new and popular today might be completely forgotten in a new bull market in say, 2025. We don’t want that so we’ll stick with the tried and true.

Please note that the some of these are not high yield, but they are reasonably safe (like Ethereum or ADA). The goal here is to minimize risk, a priority to which potential profit percentage comes second place.

This is a much safer approach than to try and guess what will be popular when markets move up again, which could very well take years. Here’s a list of 10 coins that survived the last crypto winter (there may be others that are worth exploring):

  • Bitcoin (BTC)
  • Ethereum (ETH)
  • Cardano (ADA)
  • Litecoin (LTC)
  • Monero (XMR)
  • Tron (TRX)
  • Ripple (XRP)
  • ChainLink (LINK)
  • VeChain (VET)
  • Matic Network (MATIC)
 
Let’s begin
For each of the coins above, we will take the covid dip of march 2020 (their absolute bottom) and their eventual 2021 all-time-high to calculate the percentage gain for reference. We then sort by percentage gain, from small to large. 
Percentage gains from covid low to ATH

Even though past results are no guarantee for future results, it is here that we gain our first insight into absolute bottoms and tops, which helps to paint a picture of what the best long-term investment might be. 

Let’s add today’s price for each of these pairs to establish by how many percent they dropped and sort our list by that percentage (low to high). Note that some coins have invisible decimals but visually, we round down to cents.

Aside from BTC, this list provides a good indication of which coins are the most stable, have the ‘highest intrinsic value’ or have ‘the most utility’. All of this is subjective of course, but there’s a reason some dropped less than others and whatever that reason is, is up to you to find out (if you feel like doing so).

Current price and drop % from ATH

Next order of business is to estimate risk for each of these. For example, TRX will see relatively low risk as it is used for USDT transactions. XRP is popular but involved in a lawsuit, making it a moderately risky investment with potentially high returns. Here’s my estimation for each of these pairs as an example. Don’t copy my sloppy risk assessment, do your own research instead.

Long term risk estimate for each pair
Risk indication added

 

The information we now have at our disposal was easy to collect and gives us an idea of strength and potential returns if the previous ATH is reached again in the future. It helps us decide which coins will be in our long-term portfolio. The next step is to determine our entries. 

We’ll want to enter as low as possible, because a lower entry amplifies returns and reduces risk. As an example, look at any coin’s “Drop % from ATH” and then “Profit % at ATH”. For BTC, you will see a drop of 72% but a return to ATH level constitutes a gain of 1724%. The drop percentage comes back as a profit percentage many times over and this is why you want to enter as low as you possibly can.

 

Let’s DCA

First of all, let’s not try to guess where the bottom will be this time around, it won’t work. It’ll take a while for the markets to come down fully. Instead, we assume the previous lows are the absolute bottom and define our first entry pretty low and for a really small amount (relative to portfolio). 

In this post, let’s assume we have $3000 to invest in total and we invest in all 10 coins in this list. That equates to roughly $300 per coin, but you can prioritize the ones you believe in the most at the expense of the ones you believe in the least.

Our initial investment will be very small and begins fairly low. I like ADA for sentimental reasons. If I were to invest in ADA, the current price is $0.47 which is way too high to begin DCA. After all, the covid low for ADA was $0,03 so the current price is not so attractive. 

We can place limit orders though. Let’s set our first limit order at $0,255 (25,5 cents) so we buy low while avoiding the round numbers where everyone places their orders, increasing the chance of the order getting filled. Next, we set several limit orders at lower prices. For these limit orders, we calculate the average entry price that we use to calculate our PnL (in the “DCA Avg” cell).

ADA DCA Entries and profit calculation based on previous ATH

Because we buy higher quantities as the price drops, our average entry comes down as we buy more. None of the values used above are set in stone, just use the ones that make sense to you and try to keep your DCA Avg (average entry price) as low as possible while still keeping the probability of the initial orders filling reasonably high. In this example, even though we made our first purchase at $0.255, our average entry is $0.08 after all orders have filled. That’s 4550 ADA at 8 cents on average, which is not bad at all. Had we started at $0,155 instead of $0,255, we would be in a better position, but most likely not all orders would get filled. It’s up to you whether you want to focus on the lowest price or a larger amount of coins in your portfolio. The sweet spot is different for everyone.

There are a few more things to take into consideration here. One is that price might drop far below what you considered would be the bottom. It’s a good idea to hold some money in reserve in case this happens, provided that your coin is not going to zero, of course.

To illustrate why you’ll want to keep some extra money in reserve to catch another price drop, look at this example below and compare to the one above. We added one more DCA entry where we doubled down at $0,035. Look at the DCA Avg, total units and profit at the previous ATH and compare that to the previous example. The point is to illustrate why you want to really double down when we’re at rock bottom (but expecting to go up one day).

ADA DCA Entries and profit calculation based on previous ATH

Keep an eye on the coins you are investing in, follow them on social media or another place so you can see how your investment is doing. Bear in mind that this is a long-term strategy, your patience will be put to the test. In case of catastrophic failure of your coin, pull out. Otherwise, just hodl.

Then hodl some more. Hodl for a long time. Governments may come and go. Some celebrities will die. You may change jobs, move to another place. It doesn’t matter as long as you consider this money lost and don’t withdraw prematurely. In a few years from now, if ADA once again reaches the previous ATH, you will have made 3670% profit, turning $377,75 into $14.241,50. And that’s just ADA. You will have diversified your investment and some will perform better than others. If the next bull market is anything like the last one, profits will easily make up for losses and you can send me a bottle of whiskey. 

Will it happen? No one knows, there aren’t any guarantees. There are only past results and up until the last bull run, every peak has outdone the previous one. This is an unleveraged, reasonably low-risk and long-term approach with high probability of making a substantial profit.

If you wonder how the spreadsheet in this blog works, you can find it here.

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