Bitcoin (BTC) has experienced a significant decline, dropping by over 55% within six months of reaching its all-time high of $69,000 in November 2021.
This decrease has left investors contemplating whether to purchase BTC at its current lower price of around $30,000 or wait for further market downturns.
Given Bitcoin’s past pricing trends, it’s possible that the current price may not yet be the bottom
After 190 days from reaching its peak, Bitcoin has historically taken another 150 to 200 days to hit its lowest point in previous cycles (as indicated by the red box).
If time is any indication, it could be another 6 to 8 months before a potential bottom is reached pic.twitter.com/C1YHnfOzxC
— Rager (@Rager) May 20, 2022
This uncertainty is exacerbated by low interest rates following the Federal Reserve’s recent 0.5% rate hike. Additionally, data from Bank of America shows that global fund managers have increased their cash holdings by 6.1% to $83 billion, the highest level since the 9/11 attacks, indicating a trend of risk aversion among major pension, insurance, asset, and hedge fund managers.
Many cryptocurrency analysts, including Carl B. Menger, view the current Bitcoin market as presenting significant buying opportunities as its price seeks a bottom.
However, rather than recommending a large lump-sum investment (LSI), where investors invest a substantial amount at once, there is a seemingly safer approach for everyday investors known as “dollar-cost averaging” (DCA).
Why the Bitcoin DCA Strategy Outperforms the Majority of Asset Managers
The DCA strategy involves dividing cash holdings into twelve equal parts and purchasing Bitcoin with each portion on a monthly basis. In essence, investors buy more BTC when prices are down and less when prices are up.
This strategy has yielded impressive results to date.
For example, investing a dollar into Bitcoin monthly following its peak in December 2017—near $20,000—has resulted in a cumulative return of $163, according to CryptoHead’s DCA calculator. This translates to roughly a 200% profit from consistent investments.
The foundation of the Bitcoin DCA strategy is the belief that BTC’s long-term trajectory will consistently trend upwards. Menger asserts that by regularly acquiring Bitcoin for a set dollar amount, investors can outperform “99.99% of all investment managers and firms on the planet.”
This chart says it all #btc DCA is the most intelligent and effective approach to beating the market #bearmarket https://t.co/ndKyzAi6FT
— ahmad (@albazzi02) May 13, 2022
Potential Drawbacks of the DCA Strategy
Contrary to the success seen in the crypto market, historical returns in traditional markets do not consistently support DCA as the superior investment strategy. In fact, studies suggest that the LSI strategy often outperforms DCA.
For instance, Vanguard’s analysis of 60/40 portfolios spanning from 1926 to 2015 revealed that lump-sum investments outperformed DCA two-thirds of the time, with an average annual return of 2.4%.
Related: Bitcoin volatility continues as S&P 500 enters bear market territory
This raises the question of whether Bitcoin’s growing positive correlation with the S&P 500 index, which reached 0.96 in May, will lead to comparable outcomes for DCA and LSI strategies in the future.
Thus, consistently investing a fixed amount of cash into Bitcoin may not always yield better returns than the lump-sum approach.
So, is there a middle ground?
Larry Swedroe, the chief research officer at Buckingham Wealth Partners, suggests a balanced approach by combining LSI and DCA strategies.
He advises splitting investments, with one-third invested immediately and the remaining two-thirds spread out over the subsequent two months or quarters. This mix of strategies aims to optimize returns and mitigate risks for investors.
“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 expressed here are the author’s own and do not necessarily represent those of Cointelegraph.com. All investment decisions involve risks, and it is important to conduct your research before making any investment.
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