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I want to start investing in Bitcoins (but the question applies to other assets as well) using a simple dollar cost average strategy. What I do not understand about this strategy is how and when I should sell my asset. Suppose I invest 50$/month every month, at which point I should make a sale and how much quantity I should sell? Note that I consider this a short-medium term investment of 1-2 years and the goal of the sale operation would be to make as much profit as possible.

Note that a related question is here. However, the OP there was asking if there exists a selling dollar cost average strategy. My question, instead, is more general, as I am fine with any selling strategy, but I just want to understand at which point I should start selling.

cholo14
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    This question does not seem to have any direct relevant to bitcoins, because it applies to all investment strategies. – RonJohn Dec 17 '20 at 17:03
  • Do you see yourself as a short, medium or long term investor (and what do they mean to you wrt bitcoin)? – RonJohn Dec 17 '20 at 17:05
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    Don't you sell when you see a need to sell? – RonJohn Dec 17 '20 at 17:06
  • @RonJohn yes I would sell in case of a need, but I want to make as much profit as possible. True, the bitcoin tag can go away. For Bitcoins I had in mind short or medium, i.e. 1-2 years – cholo14 Dec 17 '20 at 17:09
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    So, you're speculating? – RonJohn Dec 17 '20 at 17:10
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    what you're doing is trading. there is absolutely no way to avoid loss in trading. – Fattie Dec 17 '20 at 17:17
  • @Fattie that's crystal clear, however, maybe there is a smart way of selling given that you buy using a DCA strategy. Or maybe not. I don't know. Hence my question. – cholo14 Dec 17 '20 at 17:18
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    I don't know why is everyone making this so complex. You buy when the price is low. You sell when the price is high. If it's not up, you don't sell. – void_ptr Dec 17 '20 at 18:08
  • @void_ptr Because people don't want a profit, they want the maximum profit, and doing that requires speculation about when prices are the lowest and highest. If you are happy with a profit, you buy now and sell higher than you bought. Then you only need to worry about whether the price will climb, not about identifying local minimums and maximums without sufficient information to do so reliably. – chepner Dec 17 '20 at 18:23
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    @void_ptr would you have said that apple was "low" after it doubled in 2005? – D Stanley Dec 17 '20 at 18:38
  • @DStanley I know. This was an attempt to show futility of "I want to make a profit for sure and not lose money." Besides, we all know that stocks only go up, so any day is a low day. – void_ptr Dec 17 '20 at 18:43
  • @void_ptr Ahh I didn't catch the sarcasm... Good point – D Stanley Dec 17 '20 at 19:05
  • Dollar cost averaging is really just about buying in, not selling, so this question doesn't have much to do with dollar cost averaging. – BrenBarn Dec 22 '20 at 09:18
  • Vanguard has research called Dollar-cost averaging just means taking risk later(google for it). Also, DCA effects get weaker by the accumulated investment as time goes by. Therefore, IMHO, DCA is merely a side effect when you invest a similar sum periodically; not a strategy or a method of investment. – user2652379 Dec 24 '20 at 04:09

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Dollar-cost-averaging is not a strategy* in my opinion, but an artifact of how many people invest in retirement accounts, for example. They put in a set amount every period, and that helps balance out the fluctuations in value. If the market goes down, you invest in lower periods and benefit when it comes back up. Yes, the investments you made when the market goes up have a loss, but the gains average out the losses. If the market goes up over time, the good periods outweigh the bad and you make a profit overall.

What you're wanting to do is time the market. You want to buy low and sell high. Which is admirable, but it is not a feature of DCA.

If what you're investing in moves up consistently, then you'd have been better off investing it all at the beginning. If it goes down, then DCA will reduce your loss by buying more in the down times. If it is stagnant, then DCA does nothing on average.

If you want to DCA bitcoin, just invest a set amount of bitcoin every month (or whatever period you want) and see what happens. Nothing is guaranteed.

at the end of the day I want to make a profit for sure and not lose money

Not possible with bitcoin. There's no way to know what bitcoin will do in the future to guarantee a profit. If you buy and it goes down - do you buy more? What if it never recovers? The only reason you'd buy an investment is if you think it will go up in value. If you think that, why not just buy as much as you can now? Why buy some and wait for it to go down to buy more?

*To be fair, it can be a strategy for reducing risk, but not a strategy to maximize return.

D Stanley
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    One more thing to factor in is that DCA increases transaction costs. So all else being equal you wind up behind if you just invested a lump sum. – JohnFx Dec 17 '20 at 18:27
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    Today, most major US discount brokers charge zero commissions so transaction costs are non existent. – Bob Baerker Dec 17 '20 at 18:49
  • @JohnFx Coinbase Pro only charges percentage fee, and not fixed ones, so that's not the case – cholo14 Dec 17 '20 at 19:31
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This year, you should have sold GOOG on Feb 20th, bought it back on Mar 20th, sold it on Sep 2nd and bought it back on Sep 23. It's absolutely clear that those were the most profitable dates for buying low and selling high. The problem is that these dates can only be known in hindsight.

Without hindsight, what's a guy to do? You have to formulate a selling strategy that you are comfortable with and accept that sometimes your strategy will be right and sometimes it will be wrong.

For example, a few months ago I bought a grey market $25 new issue preferred stock at $24.40. While my goal was to capture a quick 30-60 cent pop, I was willing to hold it for the income. Within a few days it dropped and I bought more at $23.30. I sold half when it recovered to $24.40 two weeks later. At that point, if it drops again, I buy more. If it rises, I sell the other half for another gain. I have no control over the market and it decides my subsequent actions which I'm comfortable with. FWIW, it's now $25.80 though I'm long gone. No problem.

In essence, as you can scale in with DCA, you can scale out as well. Avoid the woulda, coulda, shoulda. Take what you can (profits) and accept that getting the highest and lowest price is sheer luck.

Bob Baerker
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What I do not understand about this strategy is how and when I should sell my asset.

That's because "dollar cost averaging" is one of the silliest concepts in "investing".

Note that

  1. "dollar cost averaging" does not attempt to, and has no connection in any way, to guidance on "when to sell"

  2. "dollar cost averaging" is completely stupid. in as much as it means anything, it means nothing more than "I kept buying the same thing" or "I am on a real loser, but I can use the phrase 'dollar cost averaging' to sort of make me feel better"

Again, very simply, "dollar cost averaging" (setting aside that it is, anyway, a completely silly phrase/concept) has utterly no connection, in any way, to your question "decide when to sell".

Fattie
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  • Everyone who has 401(k) deductions performs dollar cost averaging. – RonJohn Dec 17 '20 at 17:18
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    Then that must mean that the majority of the free world with corporate retirement plans are "completely stupid" ;->) – Bob Baerker Dec 17 '20 at 17:34
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    There was this question: Does dollar cost averaging really work?. One answer has this quote *the prudent action is investing the lump sum immediately to gain exposure to the markets as soon as possible' – Bernhard Döbler Dec 17 '20 at 18:08
  • @BernhardDöbler But that is only possible if you have this lump sum. If you have ¤100 a month to invest, you can either DCA or you save until you have a multiple of ¤100 and invest that. In most cases, DCA is better then. – glglgl Dec 17 '20 at 19:12
  • @glglgl - hmm, why would it be better in most cases ? (if that is true on average in the markets - you and I have an instant way to be billionaires) – Fattie Dec 17 '20 at 23:44
  • @Fattie Because the markets tend to go up in average. At the usual rate (seen on the long scale, at least). Why do you think it would be instant? – glglgl Dec 18 '20 at 09:01