Introduction

With the market in a strange place I have been seeing and increasing number of posts about DCA, with this in mind some people might be interesting in some research I have been doing lately. I have been updating a DCA bot I wrote and shared here a while ago, with the intention of adding an improved DCA method to the script. Because of this I have been doing some research on different methods of DCAing into an asset, I was just going to include it in the post I made about the bot but there ended up being a serious amount of information, a lot of which I don’t think has been posed here before, so I decided to split this up into two posts. This will be a relatively long post because I have found 2 different methods of DCAing that I will cover below.

Dollar Cost Averaging

I am sure almost everyone knows what Dollar Cost Averaging (DCA) is, there are a couple of different ways to do it, in my opinion the most effective way is to put a small amount of your disposable monthly, weekly or daily income into an asset, if you have 10k to invest I personally don’t think DCAing is a good idea, as you are betting that the market won't always trend up with time, but this is debatable. So are there any ways to improve this? Well yes and no, the advantages of two different DCA methods below, but it is also clear that you will get a smaller return on investment (ROI) if you do them all the time.

Enhanced Dollar Cost Averaging

I found this method discussed in a paper from 2011, you can read it in more detail here, on paper it seems like it will produce better results. "Enhanced Dollar Cost Averaging (EDCA) performs better than traditional DCA 90% of the time and works even better with highly volatile assets" (So it’s made for Crypto). Simulations found that "EDCA returns between 30 and 70 basis points more than traditional DCA" (fancy way of saying between 0.3% and 0.7%).

I know what you are thinking this works better with highly volatile asset it must be perfect for Bitcoin and crypto, well lets look into that.

How does it work?

So how does it work? Well the investment strategy follows traditional DCA closely but allows for a slight change to take advantage of new market information. The EDCA strategy invests a fixed additional percentage after a down period of time, for example let's say a month, and reduces the investment by a fixed amount after an up month. Specifically, it invests an additional $Y in month t+1 if the return in month t is negative, and invests $Y less in month t+1 if the return in month t is positive.

So does it work?

Is EDCA better than DCA? In a one word answer, NO. But as all things in life it's a little bit more complicated than that.

Lets do out an example with bitcoin, the base monthly contribution for the DCA strategy means that the monthly investment amount is $100. For an EDCA strategy with a value of Y=10%, contributions are increased by 10% (to $110) when the past month’s returns are negative, and decreased by 10% (to $90) when the past month’s returns are positive.

So for this example we’ll take the price history from January 2012 to March 2021. So over these 110 months we get the following results.

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Okay so this is great, because Bitcoin trends up with time we generally have more green months than red months therefore we make substantially less gains, we would be far better sticking with a normal DCA strategy.

However, is there any time this will work? Let's do these calculations for this out for each year since 2014, the gains from 2012 and 2013 are just insane and the market wasn’t very mature anyway.

^{Note ROI calculated on a price of $43676.70 per BTC}

You can see the red years are the years where EDCA out performed DCA, and these fall in line the long bear markets, but interestingly 2021 which was very volatile. So while this method does perform very well in a bear market when it comes to ROI, it is still interesting to see that in general we end up with less Bitcoin, however this is most likely due to how I did the calculations as in my method EDCA only bought for 11 months where as DCA bought for 12 months.

Dollar Cost Averaging using RSI

After further searching I found a couple more DCA strategies in this post by momentum analytics, all were using daily investments and so I am not fully sure if this will work on longer time frames. The one I chose to analyses was buying when the 90 day RSI close was below 50 and then putting the rest of the cash you would have aside for future investment or into other assets.

How and does it work?

A visual representation of that can be seen in the image below, whenever the RSI falls below the 90 day RSI we buy $10 of Bitcoin.

When the 90 RSI falls below the green line then we buy Bitcoin at the corresponding price

Following this method we get the following results from 2014 - present day, and again as with the past method, we get a smaller ROI, although it should be noted that in the RSI version we are left with an extra $16240 to spend. If there was a way to make this method more dynamic, by increasing the amount we invest when under 50 on the RSI rather than saving we would potentially make a greater ROI, I may run those calculations, but that's for another day. It might be worth playing around with this, and checking to see if it works for weekly or monthly DCA's as well.

I don't feel like this method warrants the a year by year breakdown of results as the graph shows very clearly when the most profitable times are to buy, surprise surprise they correspond to bear markets.

Conclusions

Okay this post is getting very long and I am sure you are getting tired, so what can we take away from this? Is there a better way to DCA? Well it depends, to me it looks like the strategies I have outlined here both have advantages in bear markets over traditional DCA and that is what I expected. The whole reason I planned to do this was because I wanted to create a a DCA bot that could change it's function depending on the market conditions. The way I look at it I am always going to DCA but maybe I can increase my DCA period when in a bear market, and the RSI could very well tell me when to do this, and thus the bot could switch from DCAing to EDCAing with a greater amount of money than my regular DCA method. This is something I might test on historical data and I could share the results if there is enough interest in this post.

Anyway I thought I would share this and hopefully others will find some use in it.

If you have found other methods of DCAing I would really appreciate it if you could send them to me so I can both analyze and include them in a future post.

Please let me know if you have any questions, as I said I will also share the DCA bot in future, but currently I'm swamped in work haven't gotten time to finish it.

TLDR: Do other DCA methods work? It depends, they return greater ROI during bear markets, but traditional DCA performs better overall.

EDIT: Thanks for the kind words, this is my first post like this. I know it's not super detailed analysis but I thought it was worth exploring. A couple of you have reached out with some really interesting suggestions and I will defiantly be implementing some of them.