Crypto Bear Market Dollar Cost Averaging

Dollar Cost Averaging Crypto? Bear Market? You were probably told to be an “Up Only” Ape.

Financial freedom, clearing all debt, quality of life improvements or retirement plans. These are powerful motivations, but almost nothing in life is free. An average Joe that does not own any cryptocurrency and is looking to acquire some could be in it for the tech, or maybe they’re looking to make an investment return.

Broadly, there are four ways to acquire tokens: buying, gifting, earning, or stealing. Take stealing off the table leaves just three ways to acquire an asset that might increase in value. Or go to zero.  

It is highly unlikely that someone is going to gift a sizeable amount crypto from the goodness of their heart. Anyone in a position to start earning crypto is probably not reading this. That leaves buying. Exchanging hard earned money for tokens. Money that would have been saved or spent on something else.

Not only will this cost money, it costs time. Anyone with a full time job or other commitments could reasonably spend years before starting to feel comfortable with what tokens on a decentralised ledger are and what potential they may have. I say this because I am an average Jo with a full time job and a family. Despite spending almost every moment of my spare time on this topic, and some when I should have been working, it took years to build a framework of what I need to understand.

I don’t regret time spent reading, learning, talking to people, listening to podcasts and going to meetups. Instead of also gambling on tokens and price moves though, I would have been much better off by starting with budgeted dollar cost averaging.

Budgeted Dollar Cost Averaging

Step one is list all monthly income and outgoings. Mark inevitable spending in red:  housing, bills, food, clothes, loans, maybe some sort of savings plan. Perhaps eating habits can change, or housing costs or bills reduced by moving or making lifestyle changes, but it’s important to be realistic. These are outgoings that are essential and inescapable.

Some spending, technically, is not required but life would be miserable without it or make loved ones or dependants miserable. Love Netflix and not willing to give it up? Then don’t! This spend is marked in yellow. Finally, there is disposable income. Recreational spending. Beer? Cigarettes? Coffee? Games? Movies? Fine wine? A hobby? Some other luxury or service? Gambling? These outgoings are green.

It might be possible to shift some spending from red or yellow to green but what “don’t invest more than you can afford to lose” really means, is only use money that is disposable, that comes from that green pot in the budget.   Dollar cost averaging (DCA) means buying little and often.  It can be as simple as: every Sunday buy 10USD of BTC. Past results are no indication of future performance but just for a bit of fun, here is a fictional time traveller from the last market cycle. Let’s call him Kevin. 

FOMO – Fear of Missing Out

Kevin has heard of Bitcoin (BTC) but knows nothing about it, except the price is going up. When he opens a Coinbase account he notices the next token by market cap is something called Ethereum (ETH). He has never heard of ETH but decides to keep any eye on it and buy some at the right time.  

In December 2017, when BTC hits the very top of the bull market at $19,891.11, Kevin FOMO bought 0.34173624BTC. It cost him $6,797.51.

In January 2018, when ETH hit the very top of the bull market at $1,419.96, Kevin FOMO bought 2.62075935 ETH. It cost him $3,721.37.

In February 2018, a new ICO launches called “Legit Coin”. There have been a lot of stories on CryptoParler about Shitcoins and ICOs, but Legit Coin seems legit. Kevin pays $6,150 for 18,450 Legitcoins during the ICO. The coins are locked in a smart contract for 1 year and will be released in March 2019 when mainnet launches. 

In March 2019 the Legitcoin website goes down. It is replaced with a video of a lady having a Brazilian wax underneath a banner that reads “this isn’t the only twat we’ve pulled the rug on”. 

At this point Kevin has lost $6,150 to an ICO scam, the BTC that had cost him about $6.8k in December 2017 is worth $1,412, his ETH purchased in January 2018 for almost $3.7k is worth £385. Kevin is now down almost 90%. He has turned $16,668.88 into less than $1.8k.  

A short time after that, following attempts to make some of his losses back, Kevin takes an extended break from society in lawful custody. His various transgressions include theft of cannabis crop from a residential back garden, theft of a motor vehicle and possession of crystal meth. 

On his release around the April/May 2021 bull cycle (possible) top, Kevin sells all his BTC and ETH at the rock bottom June 2021 drop. He gets $9,842 for his BTC and $4,455.29 for his ETH. All told, Kevin’s has had a 41 month long investing journey and lost $2,371.59.  

Fortunately, being a fictional character, rather than call it a day Kevin decides to go back in time and try again. 

DCA + Gambling

Kevin has heard of BTC but knows nothing about it, except the price is going up. When he opens a Coinbase account he notices the next token by market cap is ETH. He has never heard of ETH but decides to keep any eye on it and buy some at the right time. Kevin works out a budget, cuts down his spending on cigarettes and booze, and calculates he can afford to lose 150USD every month from his disposable income.

In December 2017, BTC hits the very top of the bull market at $19,891.11. Kevin decides he is going to buy $80 worth of BTC every month. He continues to buy $80 worth of BTC every month and makes his final purchase in April 2021. Unfortunately, instead of buying on a regular schedule, he tries to time the market. He’s a terrible trader and buys the exact top, every month. Nevertheless, after his final purchase in April 2021 when BTC is at an all-time high of $64,899, Kevin has spent a total of $3,280 and now holds 0.34173624BTC. 

In January 2018, ETH hits the very top of the bull market at $1,419.96. Kevin decides he is going to buy $20 worth of ETH every month. He continues to buy $20 worth of ETH every month and makes his final purchase in May 2021. Unfortunately, instead of buying on a regular schedule, he tries to time the market. He’s a terrible trader and buys the exact monthly top, every month. Nevertheless, after his final purchase in May 2021 when ETH is at an all-time high of $4,384.43 Kevin has spent a total of $820 and holds 2.62075935ETH.

From February 2018 until June 2021, Kevin sets himself a monthly $50 trading budget. He loses count of how many times he gets liquidated on Bitmex, Bybit, Derebit and Binance; leveraging his deposits up to 100x on derivative long/short contracts. Sometimes he takes a month off and buys a hot new altcoin instead but then promptly gets rug pulled or loses access to the funds because he forgets his private key or writes it on a digital sticky note and then shuts down the computer without saving first. At the end of his 41 month trading career, Kevin has turned a total of $2050 into zero.

He decides to call it a day at the rock bottom June 2021 drop. He gets $9,842 for his BTC and $4,455.29 for his ETH.  

Kevin is quite pleased with himself.  Instead of starting with $16,668.88 and ending up with $14,297.29, he’s started with $6,150, bought the same amount of BTC and ETH as he did before and over the same period turned it into $8,147.29. Not bad. The $2,050 lost on leverage trading is bothering him though, so rather than call it a day, and thanks to him being a fictional character, Kevin decides to go back in time and try again. 

DCA and…Hedges?
Arriving in December 2017, Kevin finds a copy of Grays Sports Almanac dated June 2021 that he must have left in his pocket. There’s something very familiar about all this, he thinks to himself. Throwing the Almanac into the recycling bin, he sits down in front of his computer and gets ready to have another go at making some cash.

Same as before, he DCAs $80 worth of BTC at the monthly top from December 2017 until April 2021 and $20 ETH from the January 2018 monthly top until May 2021. Having learnt he has zero skill in either trading or picking what altcoin is next going to the moon, Kevin decides he is going to spend $50 per month on hedges.

His plan is to try and protect himself against loss by supporting more than one possible result. Not exactly a hedge in the truest sense of the meaning as he’s going to support as many results as possible without any regard for what he’s either supporting, or hedging.

Basically, once a month, at the monthly close, he’s going to look at Coinmarketcap and starting at the top of the list, work his way down until he sees something he doesn’t own yet. And then he’s going to buy it.  What could possibly go wrong?

Starting in February 2018 and finishing in June 2021, it’s been 41 months at $50 per month and for a total cost of $2,050, Kevin is now holding 41 shiny tokens.    

On 18 July 2021, Kevin sells the lot. Many tokens that had popped into the higher ranking of Coinmarketcap the month they were bought have disappeared or crashed. MIN is now worth $3.46; $50 of TNC Coin bought in May 2020 is sold for $0.91. Acash is long gone. His LEND has disappeared, apparently there was a tokenswap into something called AAVE, “whatever that is” he says to himself. The internet computer has dropped in the two months since he bought it in May 2021 and is now worth $14.54. At least Tether and USDC held their value, he sighs. 

Wait a minute…In January 2019, Binance coin was $7.09. For $50 dollars, Kevin picked up just over 7 of them. In July 2021, 1BNB is trading at more than 300 bucks!  Some Ponzi scheme (allegedly) called HEX has mooned too, he gets $2,653.48 for that. Other coins bought early on have stood the test of time, $50 of ADA in July 2018 is now worth $361.30. The $50 bag of EOS on the other hand, bought in April 2018, that sells for $8.47 in July 2021.  It’s all in the luck of the draw, buying from the peak of bull, through a bear and into the next market-cycle.  

At the end of the day, $2,050 spent on 41 different tokens over a period of 41 months sells for a whopping $8,195.68, a 400% return on investment. Adding that on top of the BTC and ETH he’s being DCA’ing and things are starting to look pretty good:   
 

Dollar Cost Averaging is King  

These examples show that starting at the absolute top of the 2017/18 bull market and selling after the big dip in the early part of 2021, which may or may not be the beginning of the next bear market, was profitable using DCA. Even with terrible decisions, such as buying the monthly top every month with two thirds of a monthly budget and losing the remaining third on liquidated derivatives.

On the face of it, thanks to a few lucky wins, simply buying whatever is new at the top of Coinmarket over the same period looks like it would have been immensely profitable too. 

Drawing everything together, let’s see what kind of work $100 per month over 41 months between February 2018 and June 2021 could have been done:

• BTC

$100 per month, bought at the monthly top, from Feb 18 until Jun 21, sold at the monthly bottom in June 2021. Total BTC 0.42, cost $4.1k, value when sold: $12.1k. Gain: 295%

• Tokens on CMC (except BTC and ETH)

Start at the top of the list each month on CMC and buy $100 worth of the highest value token that month not already owned. Begin in Feb 18, continue until Jun 21. Sell at the weekly closing price on 18 Jul 21. Total cost $4.1k, value when sold: $16.4k.
Gain: 400%  

1. ETH

$100 per month, bought at the monthly top, from Feb 18 until Jun 21, sold at the monthly bottom in June 2021. Total ETH 13.06, cost $4.1k, value when sold: $22.2k.
Gain: 541%

In short. From the end of the last bull cycle in 2017/18 until June 2021, if you didn’t know what you were doing and wanted to get involved, the answer would have been dollar cost averaging. Looking to the future, there’s some food for thought.

Never invest more than you can afford to lose.