What is DCA Crypto Strategy?



As we mentioned in the previous articles, cryptocurrency trading bots are computer programs that implement a specific trading strategy. DCA crypto bots are one of the most favourable bots, which do the trading based on the Dollar Cost Average strategy of trading. In this article, we are going to explain the DCA bot and the concept behind it.

How does DCA crypto strategy works?

Dollar cost averaging (DCA) refers to the recurring purchase of a smaller number of assets within a specified time interval no matter how the price changes, instead of lump sum investing. Generally, most people try to buy during a short-term market downturn and bear market. Implementing the DCA crypto strategy can reduce the risk of investing too much money at once and losing a high fraction of investment by mal prediction of the entrance time.

To use DCA, you first need to decide how much money you are willing to invest, and then you need to buy a smaller equivalent amount of money within a specific period of time instead of investing all the money at once. It is possible that you will buy when the Bitcoin transaction reaches its highest point in history, or you may buy it at a low price after the market has sold off. Looking at a longer period, the average price of all BTC in your wallet will balance between the top and bottom.

What is the best time to start DCA strategy

In the last year, the bitcoin price raised suddenly from below 4,000 USD in March 2020, up to 61,000 USD. So far, the Bitcoin transaction price is above 50,000 USD, which records a full increase of 1150% from March 2020. For those who have been active in the market, it has provided a huge profit opportunity, but for those who are still waiting for the time to enter the market, it is just another missed opportunity to get on the car.

The problem with the timing of the crypto market entry is to watch an asset trade at a historical high and wait for the lower levels to enter the trade. But there is no way to really know when the lower limit will come or when it will pass. If bitcoin has fallen by 12% in two days, does this mean it is time to buy or should we wait for the further drop? If we are looking for traditional value investing or buying at dip strategies, it will be hard to find any entry point. Therefore, when others are already over the moon, the crypto novices have repeatedly missed entrance opportunities and also lost because of buying at high prices. At these periods of time, in which there is a huge tendency toward trading the cryptocurrencies, and there is no way to predict a good entrance point based on traditional strategies of trading, we can reduce the risk of all-in at high prices by entering the market at different time intervals. This idea is the backbone of Dollar Cost Averaging (DCA) trading bots

Benefits of crypto DCA

DCA (dollar cost averaging) is generally advantageous. It allows you to buy at low prices and sell at high prices, but of course, there are a couple of disadvantages. In an extreme bull market, such as the past four months, it may be better to invest lump sum amount at once than the average price over time. But again, this kind of summary can usually only be drawn after the fact. Neither you nor any crypto investor who claims to be a legend in technical analysis knows this in advance.

The real purpose of DCA is to reduce risk at crypto investing in volatile markets. Depending on your market performance when you make a scheduled purchase, DCA may make you reduce your losses, or it may help you increase your gains. DCA tries to prevent you from buying at the top and sustaining losses for a long time. Perhaps the real benefit of DCA is that it reduces the emotional pressure of all-in at a single price.

As the risk decreases, the return will decrease, but if you are a long-term optimist about Bitcoin and are just looking for a way to easily holding it, then when you buy the first Bitcoin, the dollar cost averaging strategy is worth considering.

Drawbacks of DCA crypto

Although the cost averaging method is a profitable strategy, some people are sceptical of it. It performs best when the market experiences large volatility because the strategy is to mitigate the impact of high volatility on positions.
But according to some people, when the market is performing well, this strategy will make investors lose profits. If the market is in a sustained bull market trend, it can be assumed that those who invested earlier will get better results. In this condition, the cost averaging method will inhibit the gains in the upward trend, and the one-time investment may exceed the gains of the averaging cost method.

By the way, for most of the crypto investors who do not have a large amount of capital to make a one-time investment, the average dollar cost is a suitable strategy.

How to test the results of DCA bots performance before investing

You can find a concise version of the Bitcoin dollar cost averaging performance bot Calculator on dcabtc.com. You can specify the number, time range, interval, and parameters to modify the strategies during a specified time period. By optimizing the parameters, you can have a backtest on the crypto automation strategy and find the result of gradual entrance to the market with DCA bots. 

dca crypto bot
Figure 1. DCA Bot’s performance results, starting from five years ago.

As an example, if you have bought $10 worth of Bitcoin every week in the past five years, the graph below shows your investment performance. $10 per week does not seem to be much, but by April 2021, your total investment will be about $2600, and your bitcoin investment will be worth about $62,000.

How to apply DCA bots?

WunderTrading – an automated trading platform, allows you to use the DCA (dollar cost averaging) principles in bots manual trading, as well as automated, meaning you can apply it to any crypto trading bot that you employ. Try the DCA bot now. At WunderTrading users can apply DCA trading bot to any integrated crypto exchange, including Binance, Bybit, FTX, FTX.US, Deribit, Kucoin, OKX, BitMEX, coinbase pro, Huobi, Kraken, etc. Other features of WunderTrading includes arbitrage and futures spread trading terminal, multiple account management, copy-trading (also known as mirror trading). Advanced analytics of orders and portfolio are available for all users.

To sum up

The cost averaging method is a redemption strategy for establishing positions, which can minimize the impact of volatility on investment. It divides the investment into smaller parts and buys each part regularly. The DCA bots, give you the chance to enter the market at the local minimum points in specific time periods.