Bitcoin (BTC) has dropped more than 55% six months after hitting a record high of $69,000 in November 2021.
The massive drop has left investors in a stalemate as to whether they should buy BTC while it’s cheaper, at around $30,000, or wait for another market sell-off.
the more you look before $BTC price history might think it’s more the bottom
190 days after its all-time high, Bitcoin had another 150 to 200 days before bottoming out the last few cycles (red box)
If time is any indication, it could be another 6 to 8 months pic.twitter.com/C1YHnfOzxC
– Rager (@Rager) 20 May 2022
This is mainly because interest rates are lower despite the Federal Reserve’s recent 0.5% rate hike. Meanwhile, cash holdings among global fund managers rose 6.1% to $83 billion, the highest level since the 9/11 attacks. This shows risk aversion among the top retirement, insurance, asset and hedge fund managers, according to the latest Bank of America data.
Many crypto analysts, including Carl B. Menger, see greater buying opportunities in the Bitcoin market while the price is looking for a bottom.
However, instead of recommending a lump sum investment (LSI), where investors throw a large sum to enter a market, there is a seemingly safer alternative for the casual investor called the “dollar cost average” or DCA.
Bitcoin DCA strategy can surpass 99.9% of all asset managers
The DCA strategy is for investors to divide their cash holdings into twelve equal parts and buy Bitcoin with each part each month. In other words, investors buy more BTC when their price drops and less of the same asset when their price rises.
The strategy has yielded incredible results so far.
For example, according to CryptoHead’s DCA calculator, a dollar invested in Bitcoin each month after peaking in December 2017 – about $20,000 – gave investors a cumulative return of $163. This translates to around 200% profit from consistent investments.
The Bitcoin DCA strategy also stems from the idea that the long-term trend of BTC will always be skewed upwards. Menger claims that regularly buying Bitcoin for a certain dollar can cause investors to “beat 99.99% of all investment managers and firms on planet Earth.”
This chart says it all #btc DCA is the smartest and most effective way to beat the market #market where prices are falling https://t.co/ndKyzAi6FT
— ahmet (@albazzi02) May 13, 2022
Cracks in DCA strategy
However, historical returns in traditional markets do not favor DCA as the best investment strategy. Instead, the LSI strategy has proven to be better.
For example, a study of Vanguard’s 60/40 portfolio that looked at each 12-month timeframe from 1926 to 2015 found that one-time investments outperformed DCA by two-thirds and averaged 2.4% on a calendar. showed. on a yearly basis.
Related: Bitcoin ends week ‘on the edge’ as S&P 500 officially enters bear market
This slightly raises the possibility that Bitcoin, whose daily positive correlation with the S&P 500 index rose to 0.96 in May, will show similar results between DCA and LSI strategies in the future.
Therefore, regularly investing in Bitcoin with a fixed amount of cash may not always yield better returns than the all-inclusive method.
But how about putting the two together?
Buckingham Wealth Partner’s chief research officer, Larry Swedroe, believes investors should invest from a “glass half full” perspective, meaning a mix of LSI and DCA.
The analyst wrote in SeekingAlpha:
“Invest a quarter today and distribute the remainder evenly over the next three quarters. Invest a sixth of every month or bimonthly for six months.”
The views and opinions expressed here are those of the author alone and may not necessarily reflect those of Cointelegraph.com. Every investment and trading move involves risk, you should do your own research when making a decision.