Investors who put all their capital at once into bitcoin win more than those who invest strategically over some time, according to a study conducted by Shitcoin Ninja.
The crypto researcher noted that Lump Sum – an act of investing everything available at once into bitcoin – works better than the Dollar Cost Strategy (DCA), which requires investors to invest in installments. He reached the said conclusion after conducting two parallel “trial” investments of $10,000 each.
The Lump Sum Investing (LSI), as explained, saw Shitcoin Ninja assuming to invest $10,000 in bitcoin at one go while the DCA strategy showed him putting the same amount into the cryptocurrency but across the span of nine years. The experiment resulted in a win for the lump sum, which beat DCA 67.9 percent of the time. The strategy made profits 60.8 percent of the time in recent datasets. Excerpts from the report:
“Dollar Cost Averaging is a form of smoothing that reduces the volatility associated with investing date. Investing at the ‘wrong’ time can cause a lot of anxiety and wishful thinking, if only I had waited to buy in or if only I sold at the peak. Using DCA, we can alleviate the pressure of worrying that we’re investing at a peak right before a looming cliff. This peace of mind comes at a high cost, though, as we are reducing the statistical average return by more than ~50% compared to Lump Sum strategy.”
Bitcoin Mirrors Global Markets
Similar studies conducted across the global markets provide the same outcomes: that LSI leads to higher portfolio values than DCA does. US investment giant Vanguard, in its 2012 report, found that LSI outperformed DCA by 67 percent in the US and UK market. At the same time, the former did better than the latter by 66 percent in DCA.
“Outside of these studies,” wrote Shitcoin Ninja, “there are also many believers in one or other strategy, that will push it without any data to back it up. Worse, sometimes they pick precisely the data that matches their result (buying at the extremes). When evaluating any investment strategy, it is important to look at the strategy overall and not at a particular point of time, which may never happen again.”
A simple trial comparing a lump sum investment in BTC to dollar cost averaging over a year found that lump sum still won ~68% of the time. Even using a more recent dataset showed that Lump Sum beats DCA ~61% of time. https://t.co/I2FOZ1vphr pic.twitter.com/PaRLyeDUWj
— Jameson Lopp (@lopp) October 18, 2019
Nevertheless, to some, DCA is not a bad strategy if an investor is looking to secure some retirement money or invest a regular amount each month from personal savings. It is better when it comes to building wealth without going overboard with one-time massive liquidity injections.
“Ultimately, the best solution is the one that gets an investor into an appropriate portfolio, encourages them to stay on track for their long term financial goals, and appropriately manages any behavioral consequences along the way,” states Nathan Faber, portfolio manager at Newfound Research.