How to build a long-term position
AlphaBlock Author: Hugo
Building a long-term (spot) position
We have all heard the same thing over and over again “buy the dip”, “buy low sell high” and all of the other classics. In some sense it’s also true, you should buy when it’s low and you should buy the dip. But you have to look at it from the right perspective, what if you bought the BTC dip to 32K which after it falls another 50% to 16K?
Did you really buy the dip and did you really buy it when it was low? No, you really didn’t. That’s exactly what this write-up is for, some actual useful and practical ideas to buy into a position instead of the classic one-liners.
Let’s start out with the term ‘low’ because this of course is very subjective, especially in crypto. Where BTC at 30K looked low before, it all of a sudden doesn’t look that low anymore when it decreases by half.
Therefore I would like to talk more about making sure you can get into the lowest average buy-in that you possibly can. If you want to buy as low as possible you should buy when the market is capitulating.
Capitulation: means surrender, so in stock-market terms, it is used to describe the point when investors throw in the towel and sell their investments. Capitulation also refers to the point when markets hit rock bottom.
This is a typical chart of price action with the different psychological aspects of price action. You clearly see here the second to last phase is the capitulation phase where price decreases significantly. In this graph, they distinguish Despair as the last phase where the price truly bottoms out.
I would like to distinguish 2 different kinds of capitulation:
- Price-based capitulation
- Time-based capitulation (could also describe this as despair)
- Price-based capitulation is where market participants basically surrender and start selling assets which leads to a declining market and a sharp drop in prices. When this capitulation phase is done it means that all market participants that wanted out have sold in the panic already and typically there will follow a relief rally shortly after.
An example of Price based capitulation: The Covid-19 crash where BTC price dropped close to 58% in a matter of only 6 days! Peak FUD where price capitulation happened and the majority of market participants sold.
- Time-based capitulation is a term that you may never hear of, you might have heard of this phase as despair. What I mean by this is not the price dropping sharply but rather sideways moving price action, sometimes slowly bleeding and making lower lows, this ultimately leads to investors getting bored or losing faith after which they will sell their assets. So it’s the sideways and boring price action that leads investors to lose faith. These capitulation phases, which basically just range, will eventually lead to price breaking out of the range.
In a bear market, these breakouts will usually break out to set lower lows until at some point the final capitulation phase happens. As an investor, you would want to buy as much as possible in this final capitulation phase to buy for the cheapest price possible.
An example of Time based capitulation: There are plenty of examples of time-based capitulation in only 2022 already. Multiple ranges as shown underneath in which price chopped for several months.
This leads to investors losing faith, and selling out until at some point the breakout happens. In all of 2022, this has led to price capitulation with a sharp drop in prices.
However, as you might have noticed in 2023 the time-based capitulation from the last couple of months of 2022 actually led to a sharp upwards move in the BTC price. This might have been the ‘final capitulation’ phase of this cycle, only time will tell. What we do know is that at least locally this has been the bottom.
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How to actually capture this capitulation
1. For price-based capitulation this would actually be very easy. You just have to set up limit buy orders to make sure you will buy when the price starts capitulating, this will get your average buying price down the further the price drops. With every buy order that gets hit, you will have bought more BTC for less $ value.
2. For time-based capitulation it’s a different kind of strategy. After price capitulation has happened and your limit buy orders have been filled, the time-based capitulation happens you could also call this an ‘accumulation phase’. With just more limited orders you won’t be able to increase your position size because the price doesn’t make new lows in this range, it just chops. So instead of this, you need to DCA in this kind of price action, buy every day/week to increase your position size until it breaks out of this range/accumulation zone again.
So why would you not just keep to limit orders and buy the price-based capitulation? Well, you would want to allocate as much of your capital as possible in the phase of the cycle where the price capitulates (despair).
In the case you would only buy with limit orders you would be side-lined with all your capital in limit orders that haven’t gotten filled yet. Instead of keeping everything in limited order you just DCA with your capital to make sure to expand your position size, and capture as much of this capitulation/despair phase as possible.
In this hypothetical case, I had buy orders set from 18.5K with a 500$ interval, in total 7 of them got hit which led to an average buy price of 17K. After this lower low at 15.5K was made I started with a DCA where I started buying BTC every day to increase my position size, since the price wasn’t making lower lows I couldn’t have averaged down my position size by just using buy orders because they wouldn’t have been filled. By using this DCA strategy you would have managed to buy at an average of around 16.8K and increase your position size.
Let’s say in a hypothetical case you were to do this you would have had an average buy-in of about 16.8–17K. With BTC now trading at 23K you would have made more than a 26% ROI already.
You might be thinking to yourself, what if the price dropped even further than 15.5K? Well, you simply would have just had an even lower average buy-in price. If the price dropped further, more of your limit orders would have been hit and your average would only have been lower. This of course is a great thing IF you’re expecting BTC to ultimately go up again, which for the record I do.
Back to reality:
In reality, though it’s not all that easy. If you played it exactly like described in the example it would have worked out great but what if you started buying already?
Personally, I have used this strategy with a long-term outlook, to build a long-term position for BTC. I set a couple of conditions for myself to hold myself accountable to:
- Set aside an amount of capital which you want to invest in total. Put aside a portion of it to set up all the limit orders and a portion of it for the DCA part of the strategy. This could be in any proportion you like, for me it has been about 70% in limit orders and 30% in DCA. Over time you can of course adjust this if you think the price is done capitulating and add more funds from your limit orders to your DCA strategy.
- Limit buy orders below 20K ranging all the way to 12K. Even if BTC were to break below 12K, I have buy orders set all the way to 8K. Disclaimer: These are smaller sizes because I think the likelihood of this happening is much lower.
- DCA when BTC is under 20K, this has been my line in the sand ever since we dropped underneath it.
The strategy with limit orders got me an average entry of 17500$ which makes up 70% of the total position.
Disclaimer: I traded during this process when BTC ran from 18K to 25K, by selling during the upwards price movement and setting up new buy orders lower, I managed to bring down my average entry later on (with more capital).
The DCA strategy has gotten me an average buy-in price of 19000$ which only makes up 30% of the position.
Disclaimer: I did continue this DCA strategy even when BTC was trading above 20K for some time which has led to a higher average entry but on the other hand it made me build a larger position. There’s a trade-off in every decision.
Using this strategy I have managed to build a position with an average buy-in price of 17.950$ which is up about 22% at the moment (BTC 23K). I use basically the same strategy for ETH as well, these are also my main holdings.
Closing thoughts
I’m happy with how this strategy has played out for me thus far. Of course this is just an example or idea how you could approach buying into a longer term spot position. Ultimately, I would like to encourage everyone to do their own research and come up with their own frameworks of how to ‘buy low’ themselves.
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