[Daily Speculation Poll] :: Cost Averaging

[adamstgBit]

[1715294526]

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[phorensic]

I only learned about this recently listening to the Tom Leykis show a couple months ago.  I think it is a great idea.  I would do it if I had no debt.  I also think it applies a bit more to a traditional stock than forex, especially the patterns that Bitcoin goes through.

[ArticMine]

Dollar cost averaging (or cost averaging with say EUR, CHF, JPY etc) is an excellent strategy for an asset that has the following characteristics:
1) Has a positive or neutral long term outlook
2) Is highly volatile in the short to medium term. The more volatile the better!
3) Is fungible and highly divisible
4) Has low or no commission fees for small purchases
 
It is ideal for investors that have a regular source of income and wish to combine acquisition of the asset with a long time savings plan. The fact that the investor also has debt should not be considered a deterrent to a long term savings plan. In fact combining debt repayment with a dollar cost averaging savings plan can be a very effective from of financial planning.

It has been used very effectively with stock mutual funds (provided they are very well diversified or an index fund). It is not a particularly good strategy for individual stocks particularly small cap stocks because they can fail (1) above. It can be used with Forex; however the trouble there is that there is not enough volatility. The key to understanding this strategy is that the object is to minimize the average cost of acquisition over the long term, rather than being concerned with each individual trade. The latter are typically made at market.

I must say that in my opinion Bitcoin at this point in its history is as ideal as an asset for dollar cost averaging as possible; however in order to take advantage of the market volatility of Bitcoin a purchase of more than twice a month should be considered. It can also be used very effectively in the smaller exchanges.

Now consider the following two scenarios I make 4 BTC purchases two weeks apart of 400 CAD each at market: The long term price is BTC/CAD 8.00. All trades are at market
1) A market that is not volatile.
Trade 1: price 400 CAD BTC/CAD 8.00 50 BTC
Trade 2: price 400 CAD BTC/CAD 8.00 50 BTC
Trade 3: price 400 CAD BTC/CAD 8.00 50 BTC
Trade 4: price 400 CAD BTC/CAD 8.00 50 BTC
Total CAD 1600 Total BTC 200 Average cost BTC/CAD 8.00

2) A market is that very volatile. For example a large player with a large short position sends the market on a wild ride in a market manipulation
Trade 1: price 400 CAD BTC/CAD 8.00 50 BTC
Trade 2: price 400 CAD BTC/CAD 1.80 222.22222222 BTC (I will leave it to the reader to determine where I got that figure)
Trade 3: price 400 CAD BTC/CAD 14.20 28.16901408 BTC (To every action there is always an equal and opposite reaction)
Trade 4: price 400 CAD BTC/CAD 8.00 50 BTC (The market is now back to normal)
Total CAD 1600 Total BTC 350.3912363 Average cost BTC/CAD 4.57 Unrealized Profit 150.3912363 BTC or 1203.03 CAD in market that over the long term did not move at all.

Two critical points here:
1) The trade at 1.80 is where the profit was made. Stick with the system. If it goes lower the next time this is more opportunity for profit.
2) The trade at 14.20 is also critical. At that point one does not know where the market will go. Our market manipulator for example may be caught in a short squeeze and send the market sky high.

Standard disclaimer applies here: Please use your own due diligence and consult a properly qualified financial adviser, in your jurisdiction,  before investing any funds. This must not be construed as investment advice to any person or persons.

[TTBit]

DCA is effectively scam pushed by brokerage firms to pay more commissions (for stocks, N/A to bitcoins). EVERY TIME they will defend their position by giving the example where you start buying at Price A, then price moves down to Price A/2, you accumulate 2x as much stock, then the stock takes off and you have more stock. What if the volatility is to the upside, and not the downside?

Take this example:
A)
You buy $5,000 bitcoins at $8 (625 coins)

-or-

B)
You buy $1,000 bitcons at $8 (125 coins)
You buy $1,000 bitcoins at $10 (100 coins)
You buy $1,000 bitcoins at $15 (66.67 coins)
You buy $1,000 bitcoins at $25 (40 coins)
You buy your last $1,000 bitcoins at $50 (20 bitcoins)

Would you rather have $31,250 worth of coins in scenario A, or ~$17,500 in scenario B)?

If you believe in an asset, invest what you are willing to lose when you have the funds. Turning $31k trades into $17k trades is for losers.

Dont get me wrong, if you are working with an income stream - putting int $1,000 per month - then you will be DCA by default, but its not a 'strategy' that is +ev. I would argue if coins are going to $1000/btc, you are better off buying now no matter what the volatility may bring.


 

[legitnick]

 

[ArticMine]

DCA is effectively scam pushed by brokerage firms to pay more commissions (for stocks, N/A to bitcoins). EVERY TIME they will defend their position by giving the example where you start buying at Price A, then price moves down to Price A/2, you accumulate 2x as much stock, then the stock takes off and you have more stock. What if the volatility is to the upside, and not the downside?

Take this example:
A)
You buy $5,000 bitcoins at $8 (625 coins)

-or-

B)
You buy $1,000 bitcons at $8 (125 coins)
You buy $1,000 bitcoins at $10 (100 coins)
You buy $1,000 bitcoins at $15 (66.67 coins)
You buy $1,000 bitcoins at $25 (40 coins)
You buy your last $1,000 bitcoins at $50 (20 bitcoins)

Would you rather have $31,250 worth of coins in scenario A, or ~$17,500 in scenario B)?

If you believe in an asset, invest what you are willing to lose when you have the funds. Turning $31k trades into $17k trades is for losers.

Dont get me wrong, if you are working with an income stream - putting int $1,000 per month - then you will be DCA by default, but its not a 'strategy' that is +ev. I would argue if coins are going to $1000/btc, you are better off buying now no matter what the volatility may bring.


 

Or option C 156.34771732 @$31.89 This = $3908.69 @$25 per coin Turning 17k trades into $3.9k trades with a $1.1k loss is for even bigger losers. I do agree with the commission part and why quite rightly many would consider this a scam in the stock market. The answer there of course is to buy an index fund with minimal fees through a discount brokerage and forgo expensive fees and commissions on heavily marketed financial "products". A good rough rule of thumb here is the more money that is spent in marketing and promoting the "investment" the poorer the return.

[ElectricMucus]

You people speaking out against the concept don't get it.

Of course the best way to invest is at the lowest price all at once. Buy you need to be able to catch it and that needs an incredible amount of luck. Of course most people follow the strategy of only buy during an uptrend which is a fallacy. All uptrends are followed by a downtrend. To that comes that some of you ultra bulls don't recognizance that most people buy and sell.

[Qoheleth]

DCA is effectively scam pushed by brokerage firms to pay more commissions (for stocks, N/A to bitcoins). EVERY TIME they will defend their position by giving the example where you start buying at Price A, then price moves down to Price A/2, you accumulate 2x as much stock, then the stock takes off and you have more stock. What if the volatility is to the upside, and not the downside?

Take this example:
A)
You buy $5,000 bitcoins at $8 (625 coins)

-or-

B)
You buy $1,000 bitcons at $8 (125 coins)
You buy $1,000 bitcoins at $10 (100 coins)
You buy $1,000 bitcoins at $15 (66.67 coins)
You buy $1,000 bitcoins at $25 (40 coins)
You buy your last $1,000 bitcoins at $50 (20 bitcoins)

Would you rather have $31,250 worth of coins in scenario A, or ~$17,500 in scenario B)?

If you believe in an asset, invest what you are willing to lose when you have the funds. Turning $31k trades into $17k trades is for losers.

Dont get me wrong, if you are working with an income stream - putting int $1,000 per month - then you will be DCA by default, but its not a 'strategy' that is +ev. I would argue if coins are going to $1000/btc, you are better off buying now no matter what the volatility may bring.

Well, sure. If you're confident that an asset's value is going straight up, with zero fluctuation, congratulations; you don't need any advice. Buy, buy, buy, because this price will never come again.

But most people aren't Brainiac. Most people don't know that an asset's price is going straight up, with zero fluctuation. Heck, I've never heard of such an asset, even in hindsight. Generally, even if an asset is going up, there's fluctuations within that uptrend.

So, in the straight shot up that you propose here, we've established that the time to buy is "right away". But zoom in on (e.g.) the Bitcoin market, and oh, the roller-coaster ride we're having! It's been fluctuating between $8 and $9 for almost a week now! If someone wanted to buy in a few days ago, and bought at $8, they'd win against the guy who bought at $8 and $9 and $8.50 and $8 again. But the guy who showed up during the first big push on Monday night/Tuesday mornihng would have bought at $9 and done worse than the averaging guy.

Admittedly, there's an advantage to the brokerage for them to recommend this strategy when they get paid by the trade. But there's also a practical use for it, when per-trade fees are removed: once you get to a granularity where you don't know how the asset is moving anymore, how do you minimize the risk from that turbulence when taking advantage of a bigger-picture trend? Cost averaging says: don't put all your eggs in one moment's basket. Spread out, and you can act on the scale at which you're thinking.

Edit: All that said, I think a year is too big an interval for buying in to Bitcoin, if you're intending to do any speculation with it.

[David M]

I have been dollar cost averaging since April 2011 at about $US100 a month.  First coins at ~US$2

I picked this strategy due to the extreme risk profile of Bitcoins.   
A catastrophic failure would see me lose only a fraction of my intended investment.

What I did not expect was the immediate usefulness of Bitcoin. 
I have spent over half I have bought.

Good times...