Grow Your Crypto Portfolio with a Dollar Cost Averaging Strategy
This simple strategy can minimize your risks and maximize your returns over time
Welcome to the 4th edition of our new and updated newsletter. Every week we will provide you with the latest market update and a deep dive into a specific topic to get you set up for the next bull run.
Market Review
Last week we mentioned that the lows of the range at 23.3k need to hold for a continued uptrend. Welp, they didn’t.
It was a rather painful week for bulls after Bitcoin broke through the previous lows and now trading at 20.6k and Ethereum holding relatively strong just below the 1,5k level.
This week showed again how sensitive the crypto market is to external shocks and regulatory uncertainty. Silvergate Capital was a major provider of banking services to many crypto exchanges and investors, and its collapse triggered panic selling and liquidity issues among its customers (mainly crypto exchanges) and other market participants. More FUD was also already spread on socials last week, with a huge unlock of ETH coming with the Shanghai Update and also the unlock of MTGox Bitcoin that was scheduled for March. Both of it is now moved to early April, which means that these events will still linger on for quite a while unfortunately.
Our overall market analysis remains cautious in the short term. Bulls need to hope for this area around 20.6k area to hold, otherwise, we would expect to see a further move into the resistance area between 18.5-19k.
For a move upwards, we would like to see Bitcoin reclaim the previous range at around 22.3k and ideally break above 25k a little down the road, which was a strong resistance level just two weeks back. Then a continuation towards 28k-30k could be still on the table.
We don’t expect to see new cycle lows (below 15.5k) anytime soon, however, it currently does look like we will see Bitcoin revisit the previous ATH again (around 19.8k) in the coming weeks. On the positive side of things, the downside risk is limited in our eyes and we would still expect to continue higher in the next months. Therefore it's still a great time to dollar-cost-average into the markets and this article comes exactly at the right time to explain to you how and why.
What else happened this week:
Kraken to launch its own banking solution shortly. This is huge for Kraken and the space in general.
Grow Your Portfolio By Using A Dollar Cost Average Strategy
You might have heard of this strategy before - it can be utilized in various investment contexts. However, in the realm of cryptocurrency, it can be especially helpful in reducing the risk of those big price drops that could hurt your crypto portfolio. Let's take a closer look at how it works.
What is DCA and how can it benefit your investments?
DCA helps you avoid one of the classic fallacies of investing: Trying to time the market while having no clue what’s happening next. Investors tend to try to "catch the falling knife", but for most of us, this is an impossible task. Unless you're some sort of god trader, you probably won't be able to time the market perfectly. And that's exactly where DCA comes into play - you don't have to find the absolute bottom to turn a profit, you just average your buys over time.
DCA stands for dollar-cost averaging, which is a strategy for investing a certain amount of money at regular intervals or certain price levels. Traditionally this means investing the same amount of money in regular intervals (whether it's weekly, monthly, or quarterly), but in the crypto world, the scope of DCA has expanded to include investing at different price levels, moving averages, or other entry points based on technical analysis.
So who will benefit most from this strategy?
If you're looking to invest for the long haul and don't have the time or desire to keep a constant eye on prices, or if you're unsure of where the market is headed in the short term, then DCAing is for you. DCA works best for your long-term holds, coins you believe will still be there a year from now (looking at your ETH & BTC). While you can also use this approach on a short timeframe (e.g. DCA into a small cap coin over a few days), smaller altcoins usually need more attention and therefore are less well suited for DCA investments over a longer timeframe.
How can you implement this investment strategy?
As briefly mentioned above, there are different ways to DCA your investments. Two of the probably most known and common strategies are the following:
DCA at regular time intervals:
One way to apply DCA to your investments is to invest a fixed amount of money at regular intervals, such as weekly or monthly. This is probably the best way to get started with DCA if you are new to investing and/or the crypto space as it is very easy to set up (see section below).
DCA at support levels or moving averages:
Rather than investing at regular time intervals, another option is to invest when the price reaches a specific support level. A support level is a price point at which an investment is anticipated to attract more buying interest, resulting in a price rise. Examples of support levels include previous all-time highs or significant moving averages like the 200-day moving average. If you buy every time the price reaches those specific support levels, you could potentially enter the market at a lower price compared to using a time-based DCA strategy. This is because you're not following a set schedule, but rather choosing to buy when the price hits levels that are expected to act as support and drive up the price of the asset. While this method may require more time to set up, it can be a powerful tool for gradually building your investment portfolio.
The best market conditions for this strategy
Dollar-cost averaging is most effective in markets that are not trending in a particular direction, when the market is moving sideways, without a clear bullish or bearish trend. Basically a crab market: It goes up and down without any particular direction, always returning to a baseline.
When the market is trending, it can be more effective to make a lump-sum investment at the beginning as it allows you to take advantage of the current market trend. However, it can be difficult to predict where the market will go next. And that’s why Dollar Cost Averaging can be a very powerful tool.
Example of how Dollar Cost Averaging can be implemented in practice
Binance provides an example of a sideways market with occasional fluctuations. In the example, a lump-sum investment of $800 at the start is made, with each unit being priced at $10. By investing the full amount at once, the investment breaks even when the unit is worth the same at the end of the investment period. However, if $100 is invested each month instead, it takes advantage of the unit price being lower at certain times, such as $7, $5, $6, and $6.5. This brings down the average unit cost to $8.16 instead of $10.
If you want to see how dollar-cost averaging (DCA) would have worked out for you in the past, you can use DCABTC to calculate performance based on historical data:
Should you DCA now?
To make it short: Yes (no financial advice ofc), this would be a great time to start with DCA. It is like DCA has been built for these kinda markets. We are currently using DCA to get back into the majors (BTC, ETH, some altcoins) and we can recommend that you do so too.
Where can I set an automatic DCA order?
There are several platforms and exchanges that provide DCA options like Coinbase, Kraken, and Binance. These platforms generally allow you to establish automatic purchases of certain cryptos, such as Bitcoin or Ethereum, at a specific frequency, like weekly or monthly.
Please research exchanges before using them. Only send money to an exchange that you feel is secure. We suggest using Kranken, Binance or Coinbase, as they are likely reliable options (however, remember that people once trusted FTX as well… 🫢).
Steps to set DCA up on Binance:
We chose ‘Binance’ as an example of how to set DCA up, step by step explained:
Click on Wallets and then Auto-Invest
Select the Cryptocurrency you want to invest in
Determine and select all variables below
Read and agree to the Binance agreement and confirm
How much should you invest?
Well, how should we know? But DCA is useful for all portfolio sizes, it does not matter if you decide to invest 5$ monthly or 1000$ weekly. It all works. Keep in mind that some exchanges might have a minimum investment amount though.
Remember not to invest more than you can afford to lose, so you don't end up in a situation where you can't buy Christmas gifts for your mother because you went (again) all in.
Action for this week
In this section, we will summarise the main actionable items from each newsletter and other posts that are worth reading
If not happened yet, sign up on Binance, Kraken or Coinbase and set up your DCA strategy as explained above!
Don’t forget to read Arthur Hayes's latest newsletters from this week. One on the status of the US dollar as the world’s reserve currency and a view on the world after the Silvergate breakdown
and… that's all there is to it! Not many action points for this one - straightforward!
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