Warren Buffett uses dollar-cost averaging in the main stock market indexes, but the data shows that the same strategy also works very well for BTC
Warren Buffett has a message for young investors: use dollar-cost averaging in major stock market indices. However, the data shows that in the last ten years the same strategy has worked very well for Bitcoin (BTC).
The term dollar-cost averaging or DCA (equivalent to the capital accumulation plan) refers to a strategy in which the investor divides the total amount to be invested in periodic purchases of the asset in question. The theory behind this investment method is that when an asset goes up or down, investors can benefit from both directions by reducing the negative impact of price volatility.
Buffett has long expressed its optimism about dollar-cost averaging in stock market indices. Specifically, „the oracle of Omaha“ prefers funds indexed to the S&P 500 and dollar-cost averaging in the index.
However, the data indicate that the same strategy has proven efficient for Bitcoin in recent years. For five years in the last decade, Bitcoin has recorded annual earnings of 100%. In addition, 98% of Bitcoin addresses are currently in profit.
History shows that dollar-cost averaging in Bitcoin works
For example, if an investor had invested $100 in Bitcoin from January 2014 spending a total of $35,700, he would have made a profit of 1,648%, or about $589,000.
Example of DCA performance.
On August 6, the price of Bitcoin was $11,744 on Binance. At that time, CoinMetrics researchers said that the dollar-cost averaging in BTC from the maximum of $20,000 would have made a gain of 61.7%:
„Although #Bitcoin is still 30% below its ATH, the dollar-cost averaging from the market peak in December 2017 would have generated a return of 61.8%, or 20.1% per year“.
Since then, the price of Bitcoin has risen from $11,744 to $13,510, a 15% gain in three months. The average return of an investor who has used this strategy on BTC since the $20,000 peak would now be substantially higher.
There are several reasons why investing in Bitcoin over a long period worked regardless of price volatility. One of them is Bitcoin’s function as an emerging value reserve, tiny compared to gold.
During the course of 2020, Bitcoin saw a significant increase in institutional demand. BTC is attractive to institutions as it represents both a hedge and a potential investment that could see potential growth.
The dollar-cost averaging has worked for Bitcoin because BTC can mark extreme corrective steps. However, during bull runs, when the infrastructure and fundamentals improve significantly and the asset is driven by an institutional craze, its value can increase rapidly.
For example, in March 2020, Bitcoin suddenly plunged to $3,600 on major exchanges; today BTC is around $13,500 and the price has tripled since then.
Most of BTC’s addresses are already in profit
Glassnode analysts have revealed that 98% of all Bitcoin addresses are in profit. They calculated this statistic by analyzing the moment when BTC arrives at an address for the first time and recording the price at which it was purchased:
„98% of all #Bitcoin UTXOs are currently in profit. A level not seen since December 2017, and typical in the previous bull markets of $BTC“.
With an asset that has exponential growth potential, high risk strategies may become difficult to manage. As a result, dollar-cost averaging is usually a practical and efficient approach to Bitcoin.