Bitcoin’s market value has surpass $1 trillion on February 2021. The market growth of cryptocurrency is just in early stage, with unlimited potential use cases and increasing inflow year by year. However, as result of immature system, the huge volatility of cryptocurrency is a double-edged sword. And the Dollar-cost averaging (DCA) investment strategy will be the shield for investor.
What is DCA Bot?
Dollar-cost averaging (DCA) bot is an automatic trading bot which refers to assisting investor divide up total amount to be invested across periodic purchases of target cryptocurrency in an effort to minimize the impact of market volatility on the overall purchase.
Even though, there is a big different between traditional DCA bot and the DCA bot of BOXTradEx, it can be considered as the advance version. The DCA bot mentioned below is all about the BOXTradEx one.
DCA bot is a tool that allow investor make recurring purchases of cryptocurrency in a comfort way, especially, the core mechanism of this strategy is buy more when the price is low, and buy less with higher price. More than that, DCA with price range parameter can provide benefits of purchasing target asset in ideal condition. The simple illustration as below:
As you can see, DCA bot will automatically execute buy order per day from Jun. 1 to Jun. 4 when investor desire to buy cryptocurrency for 4 days and pre-set price range between 30,000 to 50,000 USDT. For a realistic example, like invest 10,000 USDT in BTC for one-year investment. As BTC/USDT chart below, bitcoin is in the long-term bullish path. What would happened if you utilize DCA strategy in 2020?
Firstly, you can simply set price range between highest and lowest price from 2017 to 2019, that is price 3,122 to 19,666 USDT. After that, the DCA bot will divide your entire amount of investment equally into market by take time interval you choose as a reference. Assume the time interval of investment is execute buy order in BTC/USDT per day at the opening price during whole year. As long as BTC fluctuate within the price range, the buying strategy will be executed directly; on the other hand, if it exceeds the price range, the bot will stop trading and accumulate unused funds to the next purchase.
In the end of 2020, your average purchase price will be 12,953 USDT which would give you 224% annual returns based on the actual market price, 28,992 USDT. By the way, you rarely spend much time in market research, also didn’t need to place order everyday manually, even less concern about short-term volatility.
Advantages and Disadvantages of DCA
DCA is generally advantageous, it can reduce risk at investing in volatile market, at the same time, it characterized by easy to use and troubleless. If only you choose favorable trading pair with long-term prospective, the DCA bot will be a low-risk, high-reward trading strategy.
About Advantages…
- Purchase at Comfort Zone
One of the special function of DCA bot is that allow user define their comfort zone of purchases in the first place. You can freely decide the minimum and the maximum price level you want to buy in. This enhance the ability to reduce probability of purchasing in high price. You can imagine when the market experiences huge volatility with big swing in either direction, the comfort zone will make you purchase at relatively low price compare to without it. In addition, the average cost of capital will remain significant low.
As two comparison below, the DCA reveal better performance when market volatile around 30,000 to 60,000 USDT. According to same conditions, total investment amount of 4,000 USDT and execute buy order per day for 4 days. DCA strategy will only complete two orders by 3,000 USDT due to the price range limitation, however, the traditional one will complete all the orders.
Consequently, the DCA will have the relatively low average unit cost of 43,333 USDT, moreover, the average unit cost of traditional DCA with no price limitation will be at 52,500 USDT. With foreseeable price soaring, the overall return on investment will differ by 21.2%.
- Painlessly Participate in Market Trend
The DCA trading strategy is painless for investor. How can that be possible? There are some reasons. First, you don’t need to invest large sums of money at one-time which could reduce your mental burdens of price concern. Second, using DCA do not required advance analytic skill, or even spend time on following the trend. Third, the DCA trading bot do the most important job, execute orders without your engaged. And the crucial one is about risk diversification through capital management.
After you understanding the mechanism of DCA strategy, you will suddenly realized this market-entry strategy is suitable to any investor.
- Decrease Risk of Single Investment
Before using the DCA bot, you may used to invest large portion of your capital in one time for your target cryptocurrency. Therefore, facing fluctuation during holding period may result in several irrational trading behaviors, such as buy at top when market surge, or reluctant to purchase when market plunge. Even though you still believe the target market has great potential in long-term, but you always did the wrong way.
So that’s why DCA bot should exist. For providing best solution to investor, with simply setting ideal price range and investment horizon. The DCA trading bot will place equally order to each time segment in relation to mitigate all-in risk, at the same time, prevent trading at inappropriate price.
For example, you will have average unit cost of 50,000 USDT if you purchase directly at single time (Jun. 1); On the other side, you will have better average unit cost of 40,000 USDT once if you using the DCA bot during investment horizon (from Jun. 1 to Jun. 4). In conclusion, the risk of high entry price is largely avoid.
- Simple and Time-Saving
Buy cryptocurrencies automatically every hour or every day, isn’t simple enough to you? With no doubt, the DCA strategy is logically easy to understand, friendly to use and very compatible to long-term investment for accumulating your wealth.
About Disadvantages…
- Constraint of Price Range
DCA strategy with determine price range may result in some problems. For instance, the advantages of split capital and a lower average purchase price will disappear if DCA bot stop running when market price exceed the range. But this issue can be solve when you extent price range to extremely level, like putting lower limit at 1 USDT.
According to the mechanism of the DCA bot, the uninvested capital will be executed together in the next interval. Furthermore, the expected investment amount cannot be fully invested if the market continually outside the price range.
As above mentioned, the DCA bot is a shield to defense the impact of high volatility on position, but this risk protection may lowering potential of profits. At contrast to previous example, the average purchase price of DCA will be 10,000 higher than traditional one (40,000 USDT compare to 30,000 USDT) if the market price at bottom in Jun. 1.
The examples indirectly as a proof of the DCA strategy is a conservative long-term investment strategy with risk-reward balance.
- Lack of Sell Order
The DCA bot provided by BOXTradEx do not support in placing sell order automatically in current version, that is at root of the main use case of DCA is for accumulation. Thus, you need to manage (sell) your crypto-asset after using DCA bot.
How to create DCA Strategy on BOXTradEx
You can visit BOXTradEx App and select DCA bot in exchange page. After you completed your registration and deposit, you can freely choose trading pair which you like and begin to utilize it’s advantages.
Here are main interface of DCA trading bot:
Parameters and User Interface
1- Total Time to Buy
This metric has two modes to setting time interval which you can switch as your demand, the initial setting and detail setting. The difference between two modes is the elasticity of setting total investment time. In detail setting mode, you can decide how many time to invest your capital at maximum to 365 days.
2- Investment frequency (per hour or per day)
Investment frequency refers to invest your capital in the given time period on an hour or daily basis. Like invest in BTC/USDT trading pair, the DCA bot will purchase BTC with same amount of USDT at every time interval. It’s should be noted that the buy action won’t happened instantly after create DCA order, the actual purchase will be executed in next hour or day.
3- Price lower limit and upper limit (USDT)
The DCA bot will only operate buy order within the pre-set price range, and stop running if market price not satisfy this limitation. No matter how large the price range is, you can use it as your plan, moreover, be ware of the higher price limit will result in higher minimum capital needed.
4- Investment (USDT）
This parameter is about how much you plan to invest in cryptocurrency by using the DCA bot. Generally, the system help you calculate the minimum amount of USDT to invest by the all trading parameters you set.
5- Any other notice
- The maximum investment horizon is 365 days;
- The bot will operate 1 hour or 1 day after the order is created;
- Total investment will average distributed in each time range. If the allocation limit is not used in last time interval, then the remaining will accumulate in next time interval.
6- Open order
The DCA order you created will show up in open order under the market price. You can click the orders for viewing more trading details.
3 Best Scenarios to Apply DCA
As with any approach, the DCA strategy has its strengths and weaknesses, but if you use it in three situations mentioned below, then, you will take advantages of making profits.
1. Bullish on Long-Term Prospective
At current stage of cryptocurrency and blockchain, the development and ecosystem construction is just on the way to prosperity. There are more and more potential of growth is waiting to explore. The DCA trading bot is the first choice to participating in crypto-world If you are optimistic about some cryptocurrencies. Let DCA bot be your best partner for serving you allocate your investment capital. Finally, enjoy the reward of long-term growth.
2. Unknowing about Analysis
Would you need to learn technical analysis? Or even understanding the meaning of on-chain activities? Absolutely Not! In contrast, with DCA bot you don’t need to know a lot of complicated and difficult analytic methods, and even don’t required any trading experiences, by saying that, the DCA bot is widely suitable to everyone, particularly the newbie.
All you need to know is how to set up trading parameters and prepare your funds to join in crypto-market.
3. Demanding Construct Your Comfort Zone
For those who have requirements to build portfolio progressively, such as professional institutions or individual investor with variable amount of capital, the DCA is the most cost-effective strategy tool for you. It can assist you invest your capital periodically without spending your time, also the merit of setting price limitation can improve your risk exposure dramatically. Anything left is customized your trading parameters in your comfort zone and accumulate your asset successfully.
Risk Warning
DCA trading bot as an automatic trading tool should not be regarded as financial or investment advice from BOXTradEx. DCA bot is used at your discretion and your own risk. BOXTradEx will not be liable to you for any loss that might arise from your use of the feature. It is recommended that users should read and fully understand the DCA trading tutorial and make risk control and rational trading within your financial ability.
