Dollar-cost Averaging vs Lump-sum Investing for Bitcoin

Which option is better (at least based on recent years)?

Adapted from image by Chanut is industries via Shutterstock, with relevant licence

With Bitcoin’s price well into the five-figure range, some of you might feel disillusioned about the prospects of owing a ‘noteworthy’ sum of BTC, especially in the coming years. However, investors have explored different approaches to gradually build their crypto portfolio, whether it be the foundation crypto or altcoins big and small. Some have been successful, other not so much.

Today we will delve into some of these options, beginning with dollar-cost averaging (DCA) and lump-sum investing (LSI). I will compare the two plans of attack with actual historical data, touch on buying the dips (towards the end of this piece), and provide my thoughts and criticisms for each strategy.
 
What is DCA and why is it appealing for many?

DCA involves investing the same amount of money at frequent intervals (e.g., $200/month) over a given period, irrespective of an asset’s price.

It is preferred by various people that are seeking a simplified approach to digital assets, let alone investing in general. This can be useful for beginners or risk-averse investors jumping into a market, and they have a basic understanding of technical analysis and macroeconomic trends.

Scenario 1: DCA returns for Bitcoin (January 2018 – present)

For context, I took the closing price of BTC on the 15th day of each month, based on statistics provided by CoinMarketCap, and stuck with this date for consistency.

The data provided here were originally displayed in various YouTube videos on my channel. In this, I primarily focus on a Bitcoin vs Ethereum DCA analysis, and which one ended up being more lucrative.

Without bombarding this article with multiple screenshots, Table 1 is a reflection on how DCA % gains can vary substantially depending on the length of time involved, when you began the process, and, most importantly for various crypto assets, the exact date when you chose to sell your assets.

Table 1: Screenshot from my original 2018-21 Bitcoin DCA calculations @ $200/month.

The table above indicates a ‘relatively’ generous ROI for Bitcoin DCA investing. I say ‘relatively’ as it could be interpreted in two different ways:

- In comparison to Bitcoin’s past performance over the years, a 397% gain over four years is rather mediocre, though, at the very least, ‘not bad’ for the vast majority of Bitcoin investors.

- In contrast to other asset classes, Bitcoin has performed phenomenally well, as demonstrated by Charlie Bilello.

Fast forward about eight months to where we are now, the 2022 data leave much to be desired (Table 2), particularly if you started DCA, then (hypothetically) decided to no longer follow the strategy and cash out. This would lead to a loss of 30%, assuming that you cashed out at roughly $21,528.

Table 2: January 2018 – August 2022 DCA overall holdings and profits; 2022 data only. I decided to include the 2022 data year-to-date for relevance.

What about lump-sum investing?

This approach comprises of investing a large sum of money all at once, whether it be annually, biennially, once every five years, etc. You could even opt for doing this twice a year, though it would gradually turn into DCA.

Scenario 2A and 2B: Lump-sum investing, with BTC purchased on 1 January and 1 July of each year (2018-22) respectively.

I crunched the numbers once again, with the identical amount of $11,200 spent all up, and assuming that the investor sold all their BTC holding on 23 August 2022, with the price of ~$21,528 per coin. This yielded mixed results. $2,400 of BTC purchased at the beginning of each year for the years in focus, offered the best ROI of 140%, as opposed to 96% for mid-year LSI and 110% with the DCA strategy (as indicated in Table 2).

Tables 3 and 4: Lump-sum investing of Bitcoin (2018-22, $11,200 overall). BTC were purchased on 1 January and 1 July respectively.

What does this say about each strategy? With all due respect, not enough, as I doubt there is a sufficient quantity of data to conclude which strategy holds up better than the other in general. Moreover, as a reminder, past performance does not provide a good representation of future results.

I am aware that I could have analysed DCA for Bitcoin since its inception in 2009. However, prior to 2017, the crypto market was insignificant in terms of market cap. I have deliberately chosen the 2018-22 date range to reflect the popularity of the crypto space across a much larger population globally in recent years, as opposed to what opportunities very early investors had with BTC. It will be fascinating to see the results of DCA and LSI for Bitcoin, Ethereum or any other digital asset in general by 2030, at least those that stick around long enough to make said comparison.

How about buying the dips?

I could make this into a scenario #3, though I will refrain from doing so for the following reasons:

-A small minority of the population is able to both identity and exploit major dips in the market, enough to allocate loads of cash to buying Bitcoin, an altcoin, crypto stocks, and so on. The dips can come in two broad forms: sudden drops specific to crypto (a blockchain or DeFi hack, scams, Terra Luna as of late…) or macroeconomic trends (COVID-19 and the current global economic outlook) that have adversely affected short-term prices at certain points.

- DCA and LSI represent plausible scenarios for most investors, notably everyday people (retail investors). Whilst there are yearly lows for any asset, good luck being able to consistently pick them every year; even just once is an achievement.

-It goes without saying that doing this would obviously provide the best ROI, so there is no need to introduce even more tables to reinforce this point.

Summary

In spite of my abovementioned points pertaining to buying the dips, we should all be seeking chances to purchase crypto, stocks or any assets during market downturns. In the long run, those who adopt a contrarian mindset: staking sats and buying ETH in the midst of a bear market, and holding until a bull run is underway, will most likely reap the biggest benefits from crypto investing, let alone any asset class.

To equip yourself for a volatile market, investors should definitely be mindful of global events, related news (not just in your country/region but even major economies globally), network upgrades, crypto partnerships, etc., as all of these factors will influence the crypto prices to varying degrees.

Recently, I have adopted a hybrid approach to crypto investing, whereby I would have periods of DCA into my crypto wallets, or wait a while, accumulate some extra funds, and then take advantage of dips from time to time. This is just my strategy. We are all different, and it is imperative to find what works best for you. Each investment type covered here has its merits and drawbacks; at least there is something for (almost) everyone when it to a Bitcoin investing strategy.

None of this is financial advice and I am not a financial advisor. It is a mixture of stats, news and opinions from either myself or the links provided. Please do your own research prior to investing in any crypto assets, let alone any product affiliated with this space.

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