Dollar-cost averaging or lump sum: Which Bitcoin strategy works best regardless of price?

Published at: May 22, 2022

Bitcoin (BTC) has declined by more than 55% six months after it reached its record high of $69,000 in November 2021.

The massive drop has left investors in a predicament about whether they should buy Bitcoin when it is cheaper (around $30,000) or wait for another market sell-off.

The more you look at prior $BTC price history the more one can think it's not the bottomAfter 190 days from the all-time high, Bitcoin still had another 150 to 200 days until it hit bottom last couple of cycles (red box)If time is any indicator, could be another 6 to 8 months pic.twitter.com/C1YHnfOzxC

— Rager (@Rager) May 20, 2022

This is primarily because interest rates are lower despite the Federal Reserve’s recent 0.5% rate hike. Meanwhile, cash holdings among global fund managers have surged 6.1% to $83 billion, the highest since the terror attacks of Sept. 11, 2001. This suggests risk aversion among the biggest pension, insurance, asset and hedge funds managers, the latest Bank of America data shows.

Many crypto analysts, including Carl B. Menger, see greater buying opportunities in the Bitcoin market as its price searches for a bottom.

But instead of suggesting a lump-sum investment (LSI), wherein investors throw down a huge sum to enter a market, there’s a seemingly safer alternative for the lay investor: dollar-cost averaging (DCA).

Bitcoin DCA strategy can beat 99.9% of all asset managers

The DCA strategy is when investors divide their cash holdings into 12 equal parts and buy Bitcoin with each part every month. In other words, investors purchase more BTC when its prices decline and less of the same asset when its prices rise.

The strategy has so far provided incredible results.

For instance, $1 invested into Bitcoin every month after it topped out near $20,000 in December 2017 has given investors a cumulative return of $163, according to CryptoHead’s DCA calculator. That is around a 200% profit from consistent investments.

The Bitcoin DCA strategy also originates from an opinion that BTC’s long-term trend will always remain skewed to the upside. Menger claimed that buying Bitcoin regularly for a certain dollar amount could have investors “beat 99.99% of all investment managers and firms on planet Earth.”

This chart speaks everything #btc DCA is the smartest and the most effective way of beating the market #bearmarket https://t.co/ndKyzAi6FT

— ahmad (@albazzi02) May 13, 2022

Cracks in the DCA strategy

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

For instance, a study of 60/40 portfolios by Vanguard, which looked at every 12-month timeframe from 1926 until 2015, showed that all-at-once investments outperformed the DCA two-thirds of the time, averaging 2.4% on a calendar year basis.

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

Thus, investing regularly in Bitcoin with a fixed cash amount might not always give better profits than the all-in method.

But what about combining both?

Larry Swedroe, chief research officer for Buckingham Wealth Partners, believes investors should invest with a “glass is half full” perspective, meaning a mix of LSI and DCA.

“Invest one-third of the investment immediately and invest the remainder one-third at a time during the next two months or next two quarters,” the analyst wrote on SeekingAlpha, adding:

“Invest one-quarter today and invest the remainder spread equally over the next three quarters. Invest one-sixth each month for six months or every other month.”

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.