Dollar-cost-averaging Using Bots on Centralized Exchanges

Chapter 10:

Previous: Withdrawing from Centralized Exchanges

Next: How to buy Bitcoin on Kucoin with a DCA Bot

Once you decide to invest in a token, how you buy or accumulate that token needs to be selected. You can buy your entire investment at once, but if you put all your money into a token and the price halves, or worse, you have lost lots of money. If, on the other hand, you put a little in each day, week, or month over a predetermined time, you will achieve a good average. Even if the price goes down over time, provided your fundamental decision to invest was correct, you will have an average purchase price, known as cost basis, well placed to reap the rewards when the price increases. This technique is called dollar-cost-averaging or DCA. Let’s go into more depth and compare DCA to trying to time the market.

Dollar-cost averaging (DCA) is an investment strategy that involves consistently investing a fixed amount of money at regular intervals, regardless of the asset’s price. This tutorial aims to provide beginners with a basic understanding of dollar cost averaging into Bitcoin (BTC). We will explore mathematical examples, discuss best and worst-case scenarios, and present alternative strategies along with their pros and cons.

Contents

Understanding Dollar Cost Averaging (DCA)

Dollar-cost averaging is a disciplined investment approach that helps mitigate the impact of short-term price volatility. It involves spreading your investment across multiple time periods, allowing you to purchase more BTC when prices are low and fewer BTC when prices are high. By doing so, DCA reduces the risk of making poor timing decisions.

Mathematical Examples

Let’s consider an example to illustrate the concept of DCA: Suppose you decide to invest $100 in BTC every month for a year. Here’s how your investment would look:

Purchase	BTC price	Amount invested	BTC purchased	BTC total
1st	$10,000	$100	0.01	0.01
2nd	$12,000	$100	0.0083	0.0183
3rd	$9000	$100	0.111	0.0294
…
12th	$15,000	$100	0.0067	0.1168

DCA Bitcoin to obtain a good cost basis

By the end of the year, you would have accumulated 0.1168 BTC through DCA.

Best Case Scenario

In a bullish market, DCA helps you capitalize on BTC’s long-term growth potential. By consistently investing, you accumulate more BTC when prices are low, resulting in substantial gains when prices surge.

Worst Case Scenario

DCA does not guarantee profits, especially during a prolonged bear market. If the price of BTC continuously declines, your investments will gradually lose value. However, DCA mitigates the risk of significant losses that may occur with lump-sum investments.

Alternative Strategies

DCA is not the only way to invest and it is not right for all people, all markets, or all assets. I present it only because it is easy to explain, has worked for me, and has a good track record when used for BTC. You need to decide what is best for you. This might mean not investing in anything. That’s OK. Here is a quick look at two alternatives to DCA.

Lump-Sum Investment

This strategy involves investing a significant amount in BTC at a single point in time. While it has the potential for immediate gains if prices rise, it exposes you to the risk of poor timing decisions and significant losses if prices decline shortly after your investment.

Value Averaging

Value averaging is similar to DCA, but instead of investing a fixed amount, you invest a variable amount to maintain a specific portfolio value. This strategy requires regular portfolio rebalancing and can be more complex to implement compared to DCA.

Timing the Market

Timing the market involves trying to predict short-term price movements and making investment decisions accordingly. This strategy requires extensive research and expertise but is generally considered risky, as accurately predicting market fluctuations is challenging.

DCA summary

DCA eliminates the need for precise market timing.
DCA reduces the impact of short-term price volatility.
DCA is a disciplined approach that encourages consistent investment.

DCS has the potential for missed opportunities for significant gains during a bull market or a brief market bottoming.
DCA requires a long-term perspective and patience to realize substantial returns.

Lump-sum summary

Potential for immediate gains if prices rise.
No need for regular investment commitments.

Exposure to the risk of poor timing decisions.
Susceptibility to significant losses if prices decline shortly after investment.

Summary

Dollar-cost averaging into Bitcoin is a popular investment strategy that helps minimize the impact of short-term price

My preferred technique is DCA, by a mile. I also buy dips in price with small extra amounts which kind of gives me the best of all worlds. Plus, although I am human and I want to make a profit, my biggest goal is just to own as much BTC as possible. As long as I only invest “spare” money, a sustained downtrend is irrelevant to me.

You have to decide what is best for you and that might be to not invest anything at all. Furthermore, the more frequently you DCA, the better your average will be. The next two articles are quick tutorials about how to automatically DCA with bots. First on Kucoin and then on Binance using $2 per day or less.