DCA vs timing the market

[brainactive]

If you were to start your bitcoin journey again, would you dollar cost average (invest fixed amount at regular intervals) or attempt to time the market (by attempting to sell the tops and buy the bottoms)?

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[mk4]

Just dollar-cost average. I personally simply just prefer increasing my income through spending more time on businesses and project rather than looking at charts all day. Not to mention that timing the markets ended up placing people in worse situations than if they simple DCA'd. Trading and timing markets is simply not for everyone.

[pooya87]

If you are fine with the risks of trading and using a centralized exchange that can scam you at any moment then why not do both?
The market is not always easy to predict and it is not always a good time to trade. You can always trade only when it is the most predictable. For example the past couple of weeks haven't been easy to predict so during those times just accumulating is better. But apart from that you can dedicate a small portion of your funds to trading. For example if you have 5BTC you use 1 for trading other times you just buy and accumulate.

[brainactive]

Sorry, I think I was a bit vague when I mentioned "timing the market".

What I meant was kind of like a dynamic DCA strategy where I invest more during opportune times and less during un-opportune times, based on some kind of metric. An example of a strategy might look something like:

Timing: invest at end of every month
Amount: amount invested each month depends on a metric (say the NUPL)
- If NUPL < 25%, invest $1500
- If 25% < NUPL < 50%, invest $1000
- If 50% < NUPL < 75%, invest $500
- If 75% < NUPL < 100%, invest $250

Has anyone considered this strategy before and/or back-tested it against a deterministic DCA strategy?

https://www.lookintobitcoin.com/charts/relative-unrealized-profit--loss/

[JayJuanGee]

Sorry, I think I was a bit vague when I mentioned "timing the market".

What I meant was kind of like a dynamic DCA strategy where I invest more during opportune times and less during un-opportune times, based on some kind of metric. An example of a strategy might look something like:

Timing: invest at end of every month
Amount: amount invested each month depends on a metric (say the NUPL)
- If NUPL < 25%, invest $1500
- If 25% < NUPL < 50%, invest $1000
- If 50% < NUPL < 75%, invest $500
- If 75% < NUPL < 100%, invest $250

Has anyone considered this strategy before and/or back-tested it against a deterministic DCA strategy?

https://www.lookintobitcoin.com/charts/relative-unrealized-profit--loss/

I started buying into BTC in late 2013, and that was at the top of a price run of about 100x for that whole year (of course in two subcycle - blow-off tops through the year).  So when I came into bitcoin I had already been able to review recent considerable price rises and attempted to invest with that knowledge in mind.

So sure there might be some attempts to time the market, but I have never really considered attempts to time the market to adequately prepare for either BTC prices going up or down, so in order to be prepared for UP, there is a need to have some stake in the game.

I don't have any regrets about what I did even though my BTC portfolio was largely negative or flat for a couple of years before it started to more clearly get into profits and even stay in profits starting late 2016 and thereafter.  

So largely I started out with a kind of front loading DCA for my first 6 months, and largely continued DCA, but also developed a strategy that involved three components.  Lumpsum investing, DCA and buying on dips.  

You can take both the funds that you have in front of you, your regular cashflow and even any kinds of surprise funds that come in and allocate those funds to the three categories.   If you do not know what the fuck you are doing, then you would start out with some kind of defaults of putting 1/3 in each of the categories.

Let's say for example, you have $1k per month or maybe better $250 per week that you can invest into bitcoin but also once or twice a year you receive lump sum payments that add up to about $6k per year.

if you have $6k from the start, you could divide that $6k into those three categories and allocate $2k to each of the three categories.  1) Lump sum (buying right away), 2) DCA set up for $100 per week for 20 weeks or $200 per week for 10 weeks or whatever variation is comfortable to you and 3) buying on dips - figure out how much you want to set - Perhaps $200 for every $1k drop in price (which would allow the setting of 20 buy orders) or $100 for every $500 drop in price which would allow for the setting of 40 buy orders or whatever increments and amounts that are comfortable for you.

By categorizing your cash and anticipated cashflow into those three categories, you can tailor to your own situation.. which will be comfortable for you in terms of how much to stress on each area and how much to add to each area if more money ends up coming in that you can allocate to your bitcoin investing.

After you build a bit of a BTC portfolio and you practice for a while, you will come up with variations of the system that work for you and allow you to have some assurance that you are investing amounts that are comfortable for you and you have some psychological assurances in terms of having cash available and I have always valued having goals of never running out of fiat to be able to buy on dips including severe dips that go beyond expectations... which sometimes happen.. and are more stressful if you have no plan for what to do for when they do end up happening..

By the way, with $250 per week that is incorporated into my above hypothetical, you can divide that into the three categories as well.  You do not have to allocate all of your new cashflow into DCA or buying right away.  So if you start with the default of dividing by 3 then you would end up putting $83 into each category, but you can also play around with both how much you put into each category and even where you place it within the category... and surely, it seems like too much work to dick around with dividing $83 up, then you could wait and set those up monthly or whatever works for you.. Sure, the various automated DCA systems do allow you to set it and forget it, so then maybe you only are left with figuring out if you might need to (or want to) lump sum invest any of your cashflow or if you want to set up some buying on dip orders.

I personally do not like to use automated DCA systems because I would rather manually buy BTC at times that are of my choosing, even though I do appreciate that automated DCA systems can really work with some people who prefer to create way less work (and ongoing BTC interactions) for themselves and that way they will not forget to execute the buy order, too.

[hd49728]

If you were to start your bitcoin journey again, would you dollar cost average (invest fixed amount at regular intervals) or attempt to time the market (by attempting to sell the tops and buy the bottoms)?

Dollar cost averaging does not relate to tops and bottoms.

In history of Bitcoin, dips with percent of fall from 20% to 30⁺% are very good to accumulate and get profit with bounces. Bounces are enough if you are in a bear market. It is not wise to buy dips and wait for new all time highs in bear market.

React differently in bull market, take dips and you will have two options to do: take profit with bounces and get out. It is good but the second option is better. Take profit with bounces and wait for a little bit pull back to buy back. Wait for a new all time high to take profit again.

[anu1908]

-snip-

i think this can be a good strategy, assuming you have a lot of money to invest. for small investors (or most retail investors) like me though, we can only prepare a small amount of investment money per month so it's not a realistic strategy. unless you want to recalculate your monthly investment or cut down your spending to do this.

[Little Mouse]

If you plan to never sell your BTC, well, you are fine to buy whenever you want to. Just buy and hold it. But that doesn't make sense at all of course.

So, if you are a DCA follower, I think you should first select how long you are going to follow the strategy. 5 years, 6 or 10 years or more. If the target is to follow the strategy for a longer range, there's no meaning of having to time the market. But if you are following for say 4 years, you must sell the tops if you are in good profit.

[DannyHamilton]

Neither.

I would buy as much as I could afford to buy immediately as soon as I discovered Bitcoin and had the opportunity to buy.  Then, I'd sit on it and hold. No selling at all. I'd continue buying more whenever any more cash became available to me, as soon as that cash became available to me.

[odolvlobo]

Neither.

I would buy as much as I could afford to buy immediately as soon as I discovered Bitcoin and had the opportunity to buy.  Then, I'd sit on it and hold. No selling at all. I'd continue buying more whenever any more cash became available to me, as soon as that cash became available to me.

That is effectively DCA for someone with irregular income. Since people generally get paid the same amount at regular intervals, they would invest the same amount at regular intervals.

What is not DCA is having a pile of money and investing it over a period of time.

Amount: amount invested each month depends on a metric (say the NUPL)
- If NUPL < 25%, invest $1500
- If 25% < NUPL < 50%, invest $1000
- If 50% < NUPL < 75%, invest $500
- If 75% < NUPL < 100%, invest $250

That is not DCA. You are still trying to time the market, investing more when you think the potential is higher and less when you think the potential is lower.

The premises behind DCA are:

• 1. The value will increase over the long term, but it is unpredictable over the short term.
• 2. An attempt to make gains based on the short term could reduce the long term gain.

[livingfree]

DCA and buy when there's a heavy crash.

No need to choose which you should use as a strategy whichever works for you, then that you should follow as a strategy. And whichever makes you comfortable and there's no regret upon buying.

That's the best strategy that you can ever do.

[JayJuanGee]

Neither.

I would buy as much as I could afford to buy immediately as soon as I discovered Bitcoin and had the opportunity to buy.  Then, I'd sit on it and hold. No selling at all. I'd continue buying more whenever any more cash became available to me, as soon as that cash became available to me.

That is effectively DCA for someone with irregular income. Since people generally get paid the same amount at regular intervals, they would invest the same amount at regular intervals.

What is not DCA is having a pile of money and investing it over a period of time.

Amount: amount invested each month depends on a metric (say the NUPL)
- If NUPL < 25%, invest $1500
- If 25% < NUPL < 50%, invest $1000
- If 50% < NUPL < 75%, invest $500
- If 75% < NUPL < 100%, invest $250

That is not DCA. You are still trying to time the market, investing more when you think the potential is higher and less when you think the potential is lower.

The premises behind DCA are:

• 1. The value will increase over the long term, but it is unpredictable over the short term.
• 2. An attempt to make gains based on the short term could reduce the long term gain.

From my point of view, there is no real disadvantage in terms of attempting to either strategize in some sense or to employ some hybrid variation of DCA - so long at the hybrid does not end up taking away a lot of the value of the kind of blind investing approach that DCA allows.  So I suppose in the end, I am not disagreeing with your overall premise odolvlobo, that some value comes from a pure investing at set intervals without giving much thought to it.

I also consider that there is value in any approach that allows individuals to tailor to their own financial and psychological circumstances.

When I first got into BTC in late 2013, I felt a wee bit of urgency to get in and to get some kind of stake in BTC, but I did divide my first six month allowance into 26, so I had an allowance for each of the first 26 weeks, and within each of the weeks I attempted to buy during dips during that week.  I doubt that my playing around with such buy timing made very much of a difference, but it did make me feel better.

You could also try the same thing on a monthly basis, and if the whole month ends up going down, then you would end up advantaging by waiting... but are the odds for down much greater than the odds for up or sideways?  Very hard to know, even when looking at all kinds of short term technical analysis variables.  Speaking of technical analysis, you could look at moving averages and if the BTC price is below certain moving averages such as below the 200 day moving average or below the 52 or 100 week moving average, then you could determine that the price is in a historically low place.. and you buy higher amounts during those times and when the price is above a lot of the indicators such as those same moving averages, then you might consider reducing your dca amounts.. and perhaps continuing DCA'ing no matter what, just adjusting the amounts. Lots of ways that could potentially make some small differences.

For sure one of the best advantages of DCA is that it gives a mechanism for folks who want to spend close to zero time attempting to figure out if the BTC price is low or high or whatever, and like you said, if they believe that the fundamentals of BTC are strong enough that in the long term the BTC price is going to be higher (or go up over time even though lots of dips in the short term), then DCA is really made for those kinds of people. 

DCA is also really built for people who do not even have any kind of lump sum that is available , and there are a lot of people like that.  So one of the most powerful ways to get into an investment for the vast majority of normies including the poorest of normies who fail and refuse to save money or invest and/or live paycheck to paycheck is to DCA.. One of the problems with normies that do not save or invest is they become tempted to dip into their investment so they do have to learn how to both let their investment ride and not be investing money that they are going to be needing in the short term.  So for example, if some normie is making $1,500 per month and barely scraping by on $1,200 of that so they only have $300 per month extra. It likely would be better for that person to figure out some fraction.. such as $100 or $150 per month that they could put into bitcoin and just to have the other fraction of $150 to $200 in savings or whatever so that they do not have to dip into their bitcoin until 10 years or longer down the road once it has had a chance to really build.. and even then there might be some reservations to really dipping into BTC if there are ways to diversify the bitcoin in such a way that it can continue to build, even after 10 years and you are spending from other sources, or maybe just small portions.. one of the real powers of compounding does come when the value reaches real high proportions, too... so sometimes it can be good to have other sources of supporting living expenses and ONLY start to consume from the BTC once it has reached a kind of self-sustainable level..l which can be quite difficult to do in terms of exercising delayed gratifications.. and not even saying to delay gratifications forever because at some point it does become prudent to start spending some or all of the built up investment (presuming that we are not all going to live forever or necessarily wanting to hand down a lot of our BTC to someone else.. even though values will differ in that regard too).   

[DannyHamilton]

Neither.

I would buy as much as I could afford to buy immediately as soon as I discovered Bitcoin and had the opportunity to buy.  Then, I'd sit on it and hold. No selling at all. I'd continue buying more whenever any more cash became available to me, as soon as that cash became available to me.

That is effectively DCA for someone with irregular income. Since people generally get paid the same amount at regular intervals, they would invest the same amount at regular intervals.

What is not DCA is having a pile of money and investing it over a period of time.

Your understanding of DCA is VERY different from mine.  One of us is wrong, and while I think it is you, I'm not confident in that belief.

My understanding of DCA is:

The investor currently has access to a sum of money.
The investor realizes that timing the market is foolish, and that they have no way of knowing whether now or later is a better time to make the purchase.
The investor solves this problem by splitting up the sum into smaller EQUAL amounts.
The investor makes regular purchases over time (daily? weekly? monthly? annually? whatever they feel most comfortable with) using one of the smaller EQUAL amounts each time.

In this way, some of the investor's purchases are made when it's cheaper, and some when it's more expensive, BUT they get the benefit of buying more bitcoin when it is cheaper, and less bitcoin when it is more expensive.

DCA is a process that is chosen to avoid accidentally making the full purchase with the available funds at an inopportune moment.

What I would do is to ALWAYS buy immediately with whatever funds are available as soon as they are available. Some of those purchases might be quite large (after an inheritance for example), some might be smaller (after a paycheck where there was still a bit left over after taking care of all obligations). They may be regular or irregular.  Regardless there would be no effort to DCA any of the purchases to try to avoid buying in at an inopportune moment.

DCA is better than failing to EVER make the Bitcoin purchase (due to constant fear that it might be "the wrong time").  However, most of the time you'll end up with more bitcoin through a single purchase using all available funds than you will from DCA.  The only time that DCA comes out ahead is when the funds become available very near the top of a bubble that is about to crash AND which won't recover in the time period that you choose for your DCA.  

[odolvlobo]

What is not DCA is having a pile of money and investing it over a period of time.

Your understanding of DCA is VERY different from mine.  One of us is wrong, and while I think it is you, I'm not confident in that belief.

My understanding of DCA is:

The investor currently has access to a sum of money.
The investor realizes that timing the market is foolish, and that they have no way of knowing whether now or later is a better time to make the purchase.
The investor solves this problem by splitting up the sum into smaller EQUAL amounts.
The investor makes regular purchases over time (daily? weekly? monthly? annually? whatever they feel most comfortable with) using one of the smaller EQUAL amounts each time.

Welll we both agree on what the best strategy is. I might be wrong, but I assume that our strategy is DCA because why would a suboptimal strategy be promoted as the best?

[DannyHamilton]

Welll we both agree on what the best strategy is. I might be wrong, but I assume that our strategy is DCA because why would a suboptimal strategy be promoted as the best?

According to the Wikipedia article:

"decades of empirical research on DCA have found that it generally does not function as promoted and is usually a sub-optimal investment strategy"

As for why...

The same Wikipedia article says:

Some investment advisors who acknowledge the sub-optimality of DCA nevertheless advocate it as a behavioral tool that makes it easier for some investors to start investing a lump sum. They contrast the relative benefits of DCA versus never investing the lump sum.

[Bttzed03]

-snip-

i think this can be a good strategy, assuming you have a lot of money to invest. for small investors (or most retail investors) like me though, we can only prepare a small amount of investment money per month so it's not a realistic strategy. unless you want to recalculate your monthly investment or cut down your spending to do this.

Why would it not work for small investors? It is a favorable strategy if you ask me because you get to build volume over time without thinking too much about trading. It also works on any market condition.

I actually find it more difficult to trade on BTC with a few hundred dollars and expect to earn something big unless you are gambling on low cap tokens.

[hatshepsut93]

DCA tells nothing about selling, so it's already hard to compare these strategies. Timing the market can also mean many different things, buy if you try to daytrading or even do just some short-term trading like buying/selling local dips and tips, you would likely be losing money.

To answer, your question, if I were starting my Bitcoin journey again, I'd buy in the deep bear market, maybe split into 2-3 purchases to gen an average price, and then continuously sell in the bull market instead of trying to time the very top. So, the hodling would take years, and it's no secret that Bitcoin performs very well if you have the basic patience and not aiming to get rich in a few months.

[mk4]

According to the Wikipedia article:

"decades of empirical research on DCA have found that it generally does not function as promoted and is usually a sub-optimal investment strategy"

As for why...

The same Wikipedia article says:

Some investment advisors who acknowledge the sub-optimality of DCA nevertheless advocate it as a behavioral tool that makes it easier for some investors to start investing a lump sum. They contrast the relative benefits of DCA versus never investing the lump sum.

I've read about this.

Basically(if my memory serves me right), DCA is a sub-optimal investment strategy as you've quoted; in terms of performance. The reason why DCA is far more recommended to the masses(not necessarily people who are already knowledgeable in the field of finance and investing) is purely psychological. Something like.. probably that a newbie investor would easily crap his/her pants when a lump-sum investment drops 10/20/30%+ in a few weeks/months. Whereas in DCA, chances are that emotions would be significantly lower due to only a certain percentage of the money being invested.

[nightxglow]

For me personally, i prefer to have regular investment, since that way i can be discipline and will always investing, so my investment will add up over the time. However, i guess having extra money prepared just in case the price got low is great too. That way i can buy bitcoin when the price is low, and maximize the profit i can get.
Just buying though, i will only sell bitcoin when it's really urgent and needed since i plan to hodl, so i won't buy it low and sell it high but investing for a long time.

[JayJuanGee]

It is a favorable strategy if you ask me because you get to build volume over time without thinking too much about trading. It also works on any market condition.

DCA is a favorable strategy for a couple of reason.  One reason is that so many normies do not tend to have lump sums available that they can invest in anything, whether we are referring to bitcoin or any other investment potential.   Another beneficial aspect of DCA is that very many people have much greater abilities to assess their finances on shorter term bases, such as when they get their paycheck or maybe a month or two into the future, so in that sense, they can assess the extent to which they might be able to take small amounts of value in a shorter period rather than committing to larger amounts of value that might take them longer to earn back (if they were to have credit).

Regarding DCA working in "any" market condition, there is quite a bit of truth to that, but there is also some truth that if the asset is ever-spiraling down in value and never really has a bounce above the average buy price, then DCA could end up causing someone to continue to invest at prices that are above the future price.  So, in that sense, there is a bit of a presumption that anything that dollar cost average bought into should have a higher value/price with the passage of time in order for the investment to be profitable.  Also, if the investment merely remains flat or just goes up a small amount (that does not even keep up with inflation) then an asset like that would not have been either a good investment and probably not even good to dollar cost average into.. so there needs to be a certain amount of expectation (that hopefully ends up being materially realized) that the asset appreciates in value greater than the average cost of investment including adding in the inflation amount for the period of time that is invested whether that is one year, 20 years  or some other period of time.