How to Profit from a Crypto Market Rebound

Newcomers often fear that they would start their investment journey at the end of a crypto rally, when all those who came before them reach a plateau and engage in profit-taking. When prices begin to fall, a market condition known as a “bear market” begins. 

We are here to tell you not to worry about starting out at the beginning of a crypto bear market. We argue that you could profit from a crypto market rebound. Here is how.

The bear market can be profitable

Let’s pretend it’s the first day of January 2018, and you have 3600 US dollars to invest. The price of Bitcoin around this time was $13,890. In 3 months leading to the new year, the price had increased threefold from $4334.

What would you do?

Well, if you had believed that Bitcoin would still increase after January 2018 (which wasn’t the case), you would invest all that $3600 into Bitcoin. Well, surprisingly — or not so surprising, since we’re living in 2021 — the price fell. 

The world didn’t see Bitcoin rise above $13,890 again until November 2020. That’s almost 3 years of seeing your portfolio in the red!

Of course, there was another way.

You could invest $100 in Bitcoin each month, despite the media telling you to do otherwise. You could continue to invest each month in Bitcoin despite everyone telling you to sell and forget about Bitcoin. 

If you do so, in May 2019 (17 months later), your Bitcoin investment would have made a positive return. By the end of that month, you would have made $913 in profit. This is how you would profit in a crypto market rebound

If you continued to invest $100 each month on Bitcoin, not taking any profit until November 2020, you would have made $6053 in profit — that’s 172% net gain from your 3-year investment. 

Meanwhile, you would only have begun earning just $1554 by the end of November 2020, if you had invested the entire $3600 in one go. 

Investing to profit from a crypto market rebound

We simulated two approaches to investing in Bitcoin — lump sum investing and dollar cost average investing. 

In both instances, we have a budget of $3600, which is completely invested with lump sum investing starting January 2018. In the second approach, we allocate $100 each month on Bitcoin for 36 months (totalling $3600 in invested money), regardless of the monthly price.

Keeping track of the average buy price

The most important component of long-term investing is keeping the average buy price as low as possible. If the market value of an asset is higher than the average buy price, we will make a profit if we sell that asset — and the opposite is true.

The average buy price is calculated as follows:

Average buy price = Total money invested in an asset ÷ total quantity of that asset 

If we were to do lump sum investing, the average buy price remains constant over time. However, if we were to use the dollar cost average approach, the average buy price is dynamic. This is because buying the asset at a lower price will increase the rate of acquiring the asset, while decreasing the rate of money invested.

In mathematical terms, at lower prices, the denominator increases while the numerator decreases, which can quickly decrease the resulting value. 

Lump sum investing vs dollar cost averaging — the comparison

The graphs below show three lines. The blue line is the open price, which is the price at which we buy Bitcoin. The red line is the monthly highest price, at which we attempt to sell Bitcoin at a maximum possible profit. The yellow or green line is the average buy price.

In this simulation, lump-sum investing “locks” the average buy price at $13,890 for almost 3 years. In July 2019, at the peak price of the month, the price of Bitcoin was $13,929. Selling Bitcoin at this time would result in a profit of $20.61.

Otherwise, the market continues to move at a lower range until November 2020. The biggest unrealised loss we could experience in this simulation is -70.6% or -$2542.

In contrast, using the dollar cost average approach, we would only need to wait 17 months until the price rebounds. Practically, we could sell Bitcoin much earlier. For example, even during the start of the bear market in May 2018, we could sell at $18 of profit. 

In this simulation, if we decide to hold out until November 2020, the biggest unrealised loss we could experience here is -41.1%. Having only invested $1200 when this occurs, the unrealised loss in monetary value is -$494 — a massive improvement compared to the $2542 unrealised loss, don’t you think?

Why is dollar cost average investing profitable in the bear market?

At first glance, this makes absolutely no sense. It goes against the common saying that “taking more risk can result in more profit”. But if we analyse this further, the math checks out.

This time, let’s use a candlestick chart of Bitcoin, showing prices between January 2018 to July 2019. As you can see below, the white line represents the average buy price that decreases ever so slowly until the price rebounds in May 2019. 

If we just focus on the time range between January 2018 and May 2019, we see that the average buy price at the end of May 2019 is $5883. 

If we decide to sell the Bitcoin at exactly $5883, we would net zero gains. This is because some of our Bitcoin were bought under $5883 and some were bought above $5883.

The gains and losses made by the “discounted” and “overpriced” Bitcoin purchases cancel each other out (see below).

Of course, the price of Bitcoin (or any other asset) will not stay this low forever. When the market recovers, or when the price pumps due to sudden positive sentiment, the market value will well exceed the average buy price.

Benefits of dollar-cost averaging

From this case study, we can identify all the advantages of adopting the dollar cost average investing strategy:

It lowers the average buy price as the market price decreases

As we’ve already mentioned, the average buy price is what will determine how profitable you will be in the future when you eventually sell your asset. Lowering it makes your investment more profitable. 

Higher market prices won’t necessarily increase the average buy price

If the average buy price is low, it stays relatively low even if the market becomes bullish. You can see this instance from May 2019 and onwards.

The unrealised loss is significantly reduced

Because the average buy price is dynamic and will stay low to follow the market price as closely as possible, you will not experience large losses if you sell your assets at a loss.

You will have more cash in hand

By investing in the asset gradually, you will not use up all your investment funds at once. You will therefore have more liquid cash in hand, which is useful when you really need it.

You can profit from a market rebound much faster

A lower average buy price makes it easier to reach a breakeven point when market conditions improve slightly. In contrast, lump-sum investing locks the average buy price, so the market has to work hard to reach the same price level in order to break even.

It’s easier to build a habit of investing regularly

If you are a regular saver, it would feel no different to invest regularly than if you set aside some money every week or month to grow your savings account.

Dollar cost averaging can relieve you of stress

In a bear market, lump-sum investing can cause you to constantly think about whether to sell at a loss to avoid incurring greater loss, or to hold out for who knows how long. In the same bear market, the unrealised loss with dollar-cost averaging can be made a lot more bearable. 

Learn more: Read our guide on dollar-cost averaging.

Takeaways

Dollar-cost average investing offers so many opportunities when the market seems frightening at first glance. This simple but powerful strategy allows you to “build up momentum” as the market price swoops down to prepare for another round of upward rallies. 

Staying in the market despite the usual panic and sellout will reward you when the market finally rebounds. When crypto market prices begin to head downwards, remember this:

Don’t panic — Dollar-cost if you can, and carry on.

With that said, here at Easy Crypto we can facilitate the dollar-cost averaging strategy by automating your crypto orders with auto-buy templates. This can be a powerful tool to achieve your crypto investment goals, and make it easier for you to keep track of your asset’s growth.

Get started with dollar-cost averaging: Read our guide on how to automate your crypto investments.

Disclaimer: This is not investment advice. You wouldn’t want to follow any of the suggestions here without first doing your own research. Before committing to adopt any of the aforementioned investment strategies, please be mindful of your budget. Good luck!