DCA Strategy of El Salvador
Nayib Bukele and Justin Sun decided to support the market by buying 1 BTC every day. They announced this on Twitter yesterday.
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Bitcoin has been the official currency of El Salvador for a year now. Nevertheless, the country was a bit unlucky with the timing of its financial revolution: its bitcoin balance lost almost $70 million during that time due to the market crash.
While everyone was worried that the Latin American experiment had failed, the charismatic president of El Salvador, Nayib Bukele, loudly announced his return: starting November 18th his country will buy 1 BTC each day, regardless of its price.
Source: Twitter
This initiative was supported by the founder of the Tron Foundation, Justin Sun, who said that he would also purchase 1 BTC every day.
Source: Twitter
An investment strategy characterized by repetitive purchases of any asset in “equal portions” at any current price is known as DCA (Dollar Cost Averaging). How can it help the market amid the collapse of FTX and another period of instability?
What is DCA?
DCA minimizes the emotional component during high market volatility. How does it work?
When you have chosen the asset, you invest only a part of your investing capital. You buy the same asset again after a certain period of time (a week, once a month, etc.). The amount you invest and the frequency of purchases should remain the same regardless of market prices.
This strategy allows for the allocation of the available capital efficiently and smooths out the average price of the asset in the long term. In this case, you don't have to search for the best entry point.
Advantages of DCA
DCA shows the best results if applied to the assets that are characterized by a steady uptrend. There is a specialized investment DCA calculator that shows the profitability of DCA strategy under specific circumstances.
If 3 years ago you started to invest $10 in bitcoin weekly, then your capital would not be $1570, but $3480. And if we apply the same arithmetic for Salvador's and Justin Sun’s strategies (which is buying 1 BTC each day), the result might not fit in the calculator register!
Source: dcabtc.com
Dollar Cost Averaging allows investors:
- reduce the negative effect of buying assets at an inflated price;
- start investing without large capital;
- assess the volatility of cryptocurrency prices and possible risks without causing harm to your nervous system and your family finances;
- have a reserve of funds for the additional purchase of assets in case of a sharp price decline.
Disadvantages of DCA
The main disadvantage of this strategy is the delayed result. It usually takes at least three weeks for this scheme to start working. It will take a year or more to get a tangible result.
If you choose the DCA strategy you should also remember its low efficiency in a stable bull market, increased costs for commissions because of the high number of transactions, etc.
Can El Salvador’s strategy help to stabilize the market? Firstly, Bukele is trying to stabilize his portfolio, not the whole market. Secondly, we should admit that 30 BTC a month is not the volume that can affect the price.
Nevertheless, the social effect that arose after Bukele's tweet may well develop into a new wave of interest in cryptocurrencies.
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