Dollar cost average or lump sum: Which Bitcoin policy works best regardless of price?

Dollar cost average or lump sum: Which Bitcoin policy works best regardless of price? – Mail Bonus

Bitcoin (BTC) has fallen by more than 55% six months after reaching its peak, $ 69,000, in November 2021.

A sharp drop has left investors in trouble over whether to buy BTC when it’s cheaper, around $ 30,000, or wait for another sale on the market.

This is primarily due to lower interest rates despite the Central Bank’s recent 0.5% rise in interest rates. At the same time, cash among international fund managers has increased by 6.1% to $ 83 billion, the highest since the September 11 attacks. This indicates a risk aversion among the largest executives of pension, insurance, asset and hedge funds, according to the latest data from Bank of America.

Many cryptologists, including Carl B. Menger, see more buying opportunities in the Bitcoin market where its price is looking to the bottom.

But instead of proposing a lump sum investment (LSI), where investors throw large amounts of money into the market, there seems to be a safer option for the player investor, called the “dollar cost average” or DCA.

Bitcoin DCA policy can overcome 99.9% of all asset management

The DCA policy is when investors divide their cash into twelve equal shares and buy Bitcoin with each share each month. In other words, investors buy more BTC when its price goes down and less of the same asset when its price goes up.

The policy has so far yielded incredible results.

For example, the dollar invested in Bitcoin each month after peaking in December 2017 – close to $ 20,000 – has given investors a cumulative return of $ 163, according to the DCA calculator CryptoHead. That means about 200% return on investment.

Bitcoin DCA calculator. Source: CryptoHead

The Bitcoin DCA policy also stems from the view that the long-term development of BTC would always be skewed to the limit. Menger claims that buying Bitcoin regularly for a certain amount of dollars could cause investors to “beat 99.99% of all investment managers and companies on planet Earth”.

Cracks in the DCA direction

Historical returns in traditional markets, however, do not support DCA as the best investment policy. Instead, the LSI policy turns out to be better.

For example, Vanguard’s study of 60/40 portfolios, which looked at the 12-month time frame from 1926 to 2015, showed that investments at one time were better than DCA two-thirds of the time, averaging 2.4% on an annualized calendar.

Related: Bitcoin ends a week “on the edge” when the S&P 500 officially enters the bear market

This raises the possibility that Bitcoin, whose daily positive correlation with the S&P 500 benchmark rose to 0.96 in May, would show similar results between DCA and LSI methods in the future.

So investing regularly in Bitcoin with a fixed amount of money might not always yield a better return than anything in the process.

BTC / USD daily price. Source: TradingView

But how about combining the two?

Larry Swedroe, head of research at Buckingham Wealth Partner, believes that investors should invest with a “glass is half full” perspective, which means a combination of LSI and DCA.

“Immediately get a third of the investment and invest the rest one-third at a time over the next two months or the next two quarters,” wrote an expert on SeekingAlpha, adding:

“Get a quarter today and invest the rest evenly over the next three quarters. Invest one-sixth every month for six months or every other month.”

The views and opinions expressed herein are those of the authors only and do not necessarily reflect the views of Every investment and trading business involves risk, you should conduct your own research when making a decision.