Never Guess the Market Bottom - Do This Instead
Find yourself guessing the market bottom? Not anymore.
Here's a receipt from Cindicator’s in-house product manager.
Today, the crypto community is often left guessing when the market will hit a sustainable bottom to start building a strong position.
It's quite a difficult task, especially now when crypto correlates to wider, macroeconomic conditions that have reached historical levels of uncertainty.
Do we really need to know when the market will hit a sustainable bottom to start getting exposure to crypto? Cindicator’s in-house product manager ponders this question, sharing his research and experience.
Sasha's experience
Nowadays, with uncertainty around the world and a high-interest climate from the U.S. Federal Reserve, investors are cutting their risk and are afraid to put money into risk-bearing assets like stocks or crypto.
This behavior is fully understandable, however, I will share my experience in the usage of the DCA (Dollar-Cost Averaging) strategy that can help you save your nerves and gain exposure to cryptocurrencies without guessing whether the market has hit its bottom or not.
In short, dollar-cost averaging involves investing the same amount of money at regular intervals over a certain period of time, regardless of price. In fact, DCA makes it easier to deal with uncertain markets as we are experiencing right now.
A similar uncertainty was in April 2022, when I had $7.5k that I was ready to invest in crypto within a horizon of 3-5 years. Bitcoin’s price was around $47k and I didn’t want to turn investing into a challenge and try to time the market to buy at the most opportune moments.
As we know – the best time is only evident in hindsight.
The Nitty Gritty
Here is what I did.
I divided the $7.5k into seven equal parts and started to invest roughly ~$1071 every fourth day of the month starting from April’22 to Stoic’s Long-only strategy. I сhose Stoic because it has proved itself well during the past bull market, outperforming Bitcoin and other benchmarks significantly.
I put the rest of the funds into Binance Earn to get passive income and withdraw from there ~$1071 on a monthly basis to continue utilizing DCA towards Stoic’s Long-Only strategy. (Today, I would be able to use a new market neutral strategy in Stoic – Fixed Income and get higher yield than Binance Earn)
Here is an illustration of my deposits into Stoic and what the Bitcoin price was during that time:
Thanks to investing the same amount of money at regular intervals, I was able to bring down the average cost of holdings (red line). I made my first deposit when Bitcoin was at $46k, but others occurred when BTC cost went significantly lower (3 out of 7 were when Bitcoin was below $20k).
If I invested by DCA in Bitcoin, my break-even point would be at $25k. Sounds much better than $46k if I invest $7k in April at once, right? Lowering the average purchase price of investments is a main benefit of using DCA.
As a result of my DCA experience, I have $5,916 in my Stoic Long-Only account right now (blue line) which is 2.55% higher than if I used DCA investing in BTC (dashed purple line). Also, it is 184% higher if I invested all funds at once in April (dashed red line).
Even though I’m still below my breakeven point by -21%, DCA helps prevent my portfolio from burning out and relieves me of the stress of having to make purchase decisions under pressure when the markets are uncertain.
Thanks to DCA, I have an exposure to the crypto market at a well-favored average price that I’m sure will work out in my investment horizon of 3-5 years.
Does Dollar-Cost Averaging always work out?
I became interested in comparing the history of DCA strategy with Lump Sum investment for Bitcoin. Lump sum investment is the opposite of DCA when you take all or a large portion of your investable cash and invest it all at once.
Lump sum investing gives the investor more exposure to the market sooner, but can be much more volatile than dollar cost averaging. That being said, I was curious to see if one strategy outperformed the other throughout history.
I took 5-year historical Bitcoin price data and simulated both a DCA and a Lump Sum investment strategy on every trading day in the past, comparing what they would return today.
For the calculations, I used a round $1k investment to stimulate both strategies: for Lump Sum I invested all $1k on one date, but for DCA strategy – I invested $1k/12 = ~$83.3 every month for twelve months. For starting dates less than 1 year ago, I held the uninvested blocks of money in cash and simply added to the present value at the end.
Below there is a difference between the two strategies with blue periods representing times when DCA results in more money today than Lump Sum. Purple periods represent times in which a Lump Sum beats DCA strategy:
For every day over the past 5 years of Bitcoin data, we see that DCA strategy beats Lump Sum 53.65% of the time and, on average, leaves the investor with $484 (based on an investment of $1k) more in his pocket.
However, in times when Lump Sum beats DCA, the investor earns on average $921 higher.
Best and Worst Days
Apparently, we see that DCA is less volatile than Lump Sum. Let’s compare the maximum drawdown and maximum return for both:
The worst day for the last 5 years to invest in BTC by Lump Sum method was on 2021-11-08, you would have now around $284 (based on an investment of $1k), it’s a -71.6% drawdown.
However, for the DCA method, the worst day was on 2021-02-11 and you would now have around $401, which is a-59.9% drawdown.
The best day for the last 5 years to invest in BTC by Lump Sum method was on 2017-09-14, you would have around $6026 now (based on an investment of $1k), it’s a +502.6% return. However, for the DCA method the best day was on 2018-06-14 and you would now have around $3833, it’s a +283.3% return.
We see that DCA strategy has much smoother results than lump sum investing, it loses less, though, also wins less.
Let’s add Bitcoin price to the chart to identify moments when some of the strategies work better:
In the chart we see that at the market peaks and during recessions, the slow and steady DCA strategy is on the winning side, but after large market drops, lump sum investment picks up momentum.
DCA Trading Bot
Is Stoic AI a DCA trading bot? Stoic is an app that integrates multiple trading strategies with the aim of outperforming the market on average. Adding funds regularly to an exchange account connected to Stoic serves as a good opportunity to dollar cost average into the market. Stoic is constantly buying and selling assets at the most opportune moments, causing it to act as a DCA trading bot by nature.
To sum up
- Dollar Cost Averaging is a less risky strategy to get exposure to the market than buying the market at once.
- It may be especially useful to beginners who don't yet have the expertise to judge the most opportune moments to buy.
- It reduces the negative effects of investor psychology. Investors avoid the risk that they will make counter-productive decisions out of greed or fear, such as buying more when prices are rising or panic-selling when prices decline.
- DCA works well during recessions, however after large market drops – Lump Sum investment is a better choice.
The current bear market has already lasted for 12 months, however, it's important to remember that uncertainty and bear markets don't last forever. Many wait for a pinnacle event and sharp breakdown below $18k for Bitcoin to start getting exposure to crypto. The problem is that nobody knows the best moment.
If you are a beginning investor and don’t want to try to time the market to buy at the most opportune moment or a long-term investor and don't have the time or inclination to watch the market – start with the Dollar Cost Averaging strategy by investing into Stoic Long Only.
With Stoic, you buy a part of the whole crypto market, thus acquiring a diversified portfolio that's regularly rebalanced.
Thank you for tuning in and as always...
Keep your fingers on the Pulse!
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Author:
Sasha Sasev
Product Manager - Stoic AI / Cindicator
Who is Cindicator?
Cindicator is a world-wide team of individuals with expertise in math, data science, quant trading, and finances, working together with one collective mind. Founded in 2015, Cindicator builds predictive analytics by merging collective intelligence and machine learning models. Stoic AI is the company’s flagship product that offers automated trading strategies for cryptocurrency investors. Join us on Telegram or Twitter to stay in touch.
Disclaimer
Information in the article does not, nor does it purport to, constitute any form of professional investment advice, recommendation, or independent analysis.