A bear market step-by-step guide to maximizing long-term returns using an index fund approach. This is a Dollar Cost Average analysis examining historical data yielding 535% growth to date.

According to historical data [1], implementing a simple DCA strategy with bitcoin would have netted you 405% if you invested $100/month from January 2018 (beginning of the last great bear run) to January 2022 (start of the current bear run). 405% is a solid return but you can increase your gains by using a diversified and optimized DCA strategy.

Today I’ll share how a Dollar-Cost Average (DCA) strategy can maximize gains using an index fund approach while increasing your return potential in a bull market. DCA is a legacy investment strategy where you make relatively small, planned purchases of an asset at specified intervals. This makes DCA strategies great at reducing timing risk, which is the likelihood you’ll invest all your money into a coin right before its price falls. It also smooths out volatility swings by averaging your investments over time, which anyone in the crypto space will know can be quite dramatic!

So at this point you might be asking yourself, “Is now the perfect time to start planning for the next few years?” Let’s get into it.

Start with the basics.

The best DCA strategy is the one that you actually remember to execute over a long period of time. Once you establish a regular investing schedule, you can begin optimizing your strategy to deliver higher gains by minimizing fees, buying the right coins, and automating it all to create a truly “set-it-and-forget-it” strategy.

How do I minimize fees?

For simplicity’s sake, pick a single exchange with competitive rates [2] and a solid reputation that’s available in your area. For the analysis below I’ll focus on using data directly from the Binance API because of its combination of the above.

What coins do I buy?

Many investors execute a simple DCA strategy with Bitcoin and Ethereum. These coins should continue to rise over time, but by limiting your buying strategy to these coins you are missing out on big gains from lesser known, up-and-coming coins. The best potential for gains as well as reduced risk is a basket of popular rising coins. By monitoring popularity and trading volume, you can diversify your investments into separate coins to spread risk and harness upside.

How do I diversify my coin selection to maximize returns?

We need a method for consistently picking the most popular coins that are likely to gain value over time. One readily available metric we can use to identify the most popular coins is Trading Volume. Trading volume can help an investor identify momentum; if trading volume increases, prices generally move in the same direction. Let’s look at historical returns if we started investing $100/month (only $1200 a year!) during the last great bear market. This $100 is evenly split among the top 10 coins (stable coins excluded) by trading volume from the previous month. These 10 coins will change monthly to form a popularity index that we reference every month to initiate our buy. We will track from January 2018 to January 2022 using Binance API data.

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Choosing to DCA invest in the top 10 coins by trading volume saw a 1,111% return at the height of the 2021 bull run. The return to date is now 535% in our current bear market; a 32% increase over just investing in Bitcoin. While not a huge difference in a bear market, this number quickly widens in a bull market as seen above. Investing in coins based on trading volume allows us to ride popularity trends. It also increases the number of coins we hold as hedges when the current top coins are dethroned in favor of newer coins.

How can I automate this strategy?

Manually checking the top traded coins on coinmarketcap then executing trades yourself is one option. But, ideally this strategy should be automated so we can set-it-and-forget-it as it requires regular buys executed over a longer period of time. Customizable trading bots like 3commas can execute this strategy but you will need to write all the logic yourself. You will also need to opt into a higher tier monthly plan to buy multiple coins at once. This can get expensive if you’re planning to run this strategy for years. On the traditional brokerage side, index funds like BITW exist but they don’t follow the same investing strategy. They are also accompanied by high fees and you won’t own the underlying coins.

I wasn’t satisfied with any of these automation options, so I called a friend with a background in financial trading algorithms and we started building one. We created a solution called Satoshi’s Index that combines the popularity index with a DCA trading tool. Please consider checking us out and join our discord if you found this strategy interesting! We love talking about different investing strategies, especially those geared toward long-term gains.

Limitations

• Historic returns never imply future returns. A crystal ball does not exist.
• This analysis comes with its own limitations. The data is from a single exchange. Binance's API was used because executing a DCA strategy over multiple exchanges is unnecessary and a headache to keep track of for most investors.
• Because data from a single exchange (Binance) was used, returns will differ if you conduct the same analysis using data from a different exchange. I could have used aggregated exchange data from Coingecko to conduct this analysis, but then actually activating this strategy would be difficult because I’d be hopping around between multiple exchanges to trade.

In Summary/ TLDR…

The best dollar-cost averaging strategy is one that is consistently executed over a long period of time. Time in the market beats timing the market. DCA is a great hedge against timing risk. Purchasing the top 10 coins based on volume data from the past month is a great way to identify current favorites and future winners without spending hours on research. Automating this solution can be a challenge, so drop by our discord to see how others are approaching it. HODL even if the market gets rough; if you invest in the right coins your patience should pay off!

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References

[1] Exported API data from my python script can be found here. Coin monthly gains can be verified through trading desk by selecting one month intervals on Binance for a selected coin paired with USDT (ie BTC.USDT)

[2] Link to exchange fee comparison