Dollar Cost Averaging (DCA) is a common investment technique, whereby a lump sum is divided into smaller amounts, and invested at regular intervals, over a chosen time horizon. The value of DCA is to mitigate risk and emotional mistakes by spreading investments across a variety of potential market conditions, rather than risking an upfront investment when markets are peaking or volatile. With DCA, investor emotion and psychology (irrational exuberance, fear…) are eliminated, and the process is far less technical and time-consuming than attempting to time the market. Although research shows that deploying a lump sum up-front usually produces greater financial returns than DCA’ing, the psychological and emotional “returns” of DCA present a worthwhile tradeoff, to a more conservative and/or less technical investor.
Non-native crypto investors, conservative investors, and investors with large lump sums are more likely to enter the volatile and unfamiliar crypto markets using DCA. These are also segments that would likely be attracted to the Coop’s products. The cost of gas, and multi-step swapping process, however, present challenges to DCA into our products. If The Coop could provide a fully automated, gas-efficient DCA feature, we could accelerate both customer adoption and retention.
CURRENT CHALLENGES W/ DCA
- Current gas fees make regular funding events cost-prohibitive for the average investor, accustomed to the low fees charged by traditional index funds. This is a significant deterrent to making regular contributions, especially if the desired frequency is weekly.
- The process of executing a swap can be cumbersome, confusing, and frustrating for a new investor - initiating the swap, negotiating a rate, and then checking back on status is … not fun.
- There are currently very limited on-ramp options, to seamlessly contribute directly via fiat.
For The Coop to execute a seamless DCA experience, a fiat on-ramp would be required, and ideally set up to manage the DCA schedule on an automated schedule. Currently only one fiat option exists, and is limited to a select few currencies.
Following is a conceptual proposal for offering DCA “variants”, for any/all Indices.
We’ll use the example of the Smith Family Office. Since “Wacky” Bob Smith sold his pet rock business in the 90’s, The Smith Family maintains an investment portfolio worth $50MM. Over a recent Thanksgiving dinner, “Bad Boy” Bobby Smith Jr. (the cool grandson), placed a few drops of something called “cryptonic” into everyone’s wine, and proceeded to convince the family board members to invest $500K into the DeFi space. The family’s conservative advisory firm initially pushed back, but after a special lunch with Bobby, they too agreed with the plan. Their two conditions were 1) that they invest in the highly regarded Defi Pulse Index as their sole vehicle and 2) they dollar cost average over 26 weeks. Everyone was in agreement, and excited for their new addiction - crypto investing.
The “DCA Variant”
All Index sets/contracts would come in two flavors - Standard and DCA. For the sake of this proposal, we’ll refer to the latter as “ $DPI-A “. $DPI-A will be a “Set within a Set”, designed to programmatically spread a lump-sum, single-interaction investment, over a predefined period (ex. 26 weeks). For The Smith’s, this offers a turn-key solution to deploying their $500K investment, over 26 x $19,200 weekly purchases of $DPI.
- In the example, The Smith’s would purchase $500K worth of $DPI-A, directly from indexcoop.com, via exchange issuance UI. (Custom issuance options could be offered, such as DCA cadence, optional insurance, etc…)
Note: This was the first and last manual transaction in the process, until redemption. The rest is automated…
- Upon execution, the contract would use $19,200 worth of ETH to purchase $DPI, while the remaining $480,800 would be used to purchase a yield-producing stablecoin which, in this example we’ll assume is DAI. These two assets are now part of a “Set within a Set”
- Each week, the $DPI-A contract would redeem 19,200 DAI, and swap them for the next round of $DPI, according to the 26-week schedule, until 100% of the initial $500K has been shifted to $DPI. (See illustration below)
In summary, the process adds another layer of rebalancing - from the stablecoin to the index. Notably, investors would only have to perform one transaction, after which the process occurs behind the scenes, with no manual effort required.
Issuance & Fees
- Issuance: The initial assumption is that the DCA variant would be Issued via exchange issuance only, as liquidity may be challenging/expensive for a smaller use case. We may suggest/enforce a minimum investment for the DCA variant, based on a sensible transaction-to-fee ratio. For further discussion.
- Gas Fees: With the potential for weekly DCA events, how might we explore a gas optimization process, in which the DCA is triggered only if/when gas fees fall below a certain threshold? For instance, if the DCA is set to occur weekly, we might set a 24 hour window in which to monitor gas fees, and trigger the DCA when optimal. For further discussion.
- Coop Fees: An incremental “DCA Fee” would be incurred, above and beyond the fees of the parent variant (ex. $DPI Standard). For discussion purposes, an incremental fee of .2% for DCA could be considered. Given the intrinsic productivity of the stablecoin, the DCA fee may be reduced to 0%, while increasing Coop income. Win win!
BENEFITS TO THE COOP
- Increase share of non-native, conservative, and high-net worth investors.
- Increase the average investment size, as customers feel safer entering the market with larger lump sums, in a single purchase event.
- DCA variants come with Unit Retention baked in, as new units of DPI are purchased automatically each period, by the contract itself.
- Yield generated by the stablecoin offsets incremental fees - a strong selling point.
- Competitive differentiation.
- Potential to attract larger accounts.
- Your feedback, questions and creative input please.
- If the sentiment is leaning positive, I will move forward with more detailed discussions, and development of a formal proposal.
- If you have more than my one month of DeFi/Crypto experience, and would like to assist with the finer details of this feature, I would love to hear from you over DM on discord.
Thanks for reading!