After a client has done their homework and concluded that they want to buy Bitcoin, the next decision for them to make iswhento buy Bitcoin to get the greatest return on their investment.
We often get clients at Swan who ask us, “Should I buy now?” Or clients who tell us, “I’m sitting on cash. I’m going to wait for the price to drop.”
Some clients decide to purchase their bitcoin all at once at a price they feel is good value. This is called Lump-sum investing — the entire amount of available funds is invested immediately.
An example of this strategy could be an individual inheriting $10,000 and investing it all immediately. It could also be an individual who has $1,000 left over from each paycheck and decides to invest it all at once every month. The key here is that allavailablecash is invested at once.
Other clients decide to use a different strategy. Instead of allocating all of their available funds at once, they buy a specified amount of Bitcoin every day, week, or month until the available funds are fully invested. This is called dollar-cost averaging (DCA), which is when the available funds are typically invested in equal-sized payments at regularly scheduled time intervals over time.
NOTE: This report written by Sam Callahan was originally sent toSwan Private clients onMarch 14th, 2023. Swan Private guides corporations and high net worth individuals globally toward building generational wealth with Bitcoin. Learn more!
For example, if an investor has $10,000 to invest, they could choose to purchase $2,000 upfront and then DCA $2,000 every week for four weeks.
Given Bitcoin’s volatility, it can be difficult for investors to know when to buy and when to wait for a better entry point.
It begs the question: Which investment strategy has historically performed better for Bitcoin investors? Have investors who invested their funds all at once (lump-sum) outperformed those who have spread out their buys over time (DCA)?
We wanted to find out the answer to these questions, so we ran the numbers.
The results may surprise you.👇
Methodology
We began by analyzing the price history of Bitcoin in the last 6 years.
To analyze the return on investment of both strategies, we ran a simulation in which we compared different DCA strategies at various time intervals compared to lump-sum investing.
We took a hypothetical scenario where an investor had $10,000 to invest.
Given human behavior, we assumed this investor would buy a certain amount of Bitcoin upfront. If an investor has already decided to buy bitcoin, it is highly likely they would buy at least some bitcoin upfront, even if they did plan to use a DCA strategy.
We then analyzed the different upfront strategies with various DCA strategies, including daily, weekly, and monthly time intervals.
Here are the DCA strategies analyzed:
We ran a simulation every day from the starting date until today. We then compared how the different investment strategies have historically performed over various periods.
Here’s what we found.
DCA vs. Lump-sum (2017-Today)
First, we examined how the strategies have performed in the last 6 years.
We compared the total amount of bitcoin accumulated by all DCA strategies vs. lump-sum since January 2017.
The y-axis shows the number of simulations run, and the x-axis shows how much the lump sum outperformed the DCA strategies.
A value of 1.00 means that the two strategies returned equal amounts; in other words, a client accumulated the same amount of Bitcoin whether they used a lump-sum or DCA strategy. A value above 1.00 means that the lump-sum strategy outperformed DCA. For instance, an outperformance of 1.03 means that the lump-sum strategy accumulated 3% more bitcoin during a given period.
On average, the chart above indicates that lump-sum has generally outperformed DCA strategies since 2017. You can see this by observing how most of the simulations were greater than 1, sometimes significantly.
DCA vs. Lump-sum (2019-Today)
Second, we examined how these strategies have performed in the last 4 years.A similar pattern emerges. Lump-sum generally outperformed DCA strategies.
DCA vs. Lump-sum (2021-Today)
Third, we compared the performance of both strategies in the last 2 years.
This chart shows how DCA strategies improved performance compared to lump-sum during this period, with more simulations scoring <1 than in previous periods.
This is to be expected during bear markets, as DCA strategies allow an investor to have cash on hand to accumulate more Bitcoin as the price moves downwards or chops sideways. Lump-sum investors are already fully invested and have to stomach the drawdowns on paper, and they don’t have additional capital to lower their cost basis.
So, in general, lump-sum strategies outperform DCA strategies, except for periods when individuals invested all of their money right before an extended period of downward price action.
Which DCA Strategy Outperformed?
When wedig deeper into the data, wefind that the longer DCA strategies underperformed the shorter DCA strategies, highlighting once again that sitting onthe sidelines can becostly when investing inBitcoin.
The chart below highlights how monthly DCA strategies drastically underperformed other DCA strategies from 2017-2023.
Inthe figure below, a10 Day (0%) strategy means adaily DCA strategy across 10 days, with zero percent allocateupfront. A4 Week (25%) strategy means aweekly DCA strategy across 4 weeks, with 25% ofcapital allocated upfront.
This data shows that the average 12-month DCA strategy accumulated nearly 75% less Bitcoin compared to the average lump-sum strategy, and the average 6-month DCA strategy accumulated around 25% less Bitcoin.
This trend can be further observed when you look at each DCA strategy more granularly.
Here, the average 10-day daily DCA strategy outperformed the average 15-day and 30-day strategies, and all three slightly underperformed the average lump sum from 2017-2023.
Daily DCA (2017-2023)
Weekly DCA (2017-2023)
This chart shows how the average 4-week DCA strategy outperformed the average 8-week DCA strategy, while both underperformed the average lump-sum.
Monthly DCA (2017-2023)
This chart shows how the average 6-month DCA strategy outperformed the average 12-month DCA strategy byasignificant margin, and both drastically underperformed the average lump-sum.
One major takeaway from this data is that the longer an investor took to deploy capital, the more they underperformed compared to a lump-sum investment.
Moral of the story: when investing in Bitcoin, historically, the earlier an investor gets their capital in, the better.
Why Has Lump-sum Consistently Outperformed?
The results above tell us that historically, an investor who decided to do lump-sum investing experienced a greater return on investment than one whose dollar cost averaged.
The question is: why?
The answer is upwards volatility. When Bitcoin moves up, it explodes.
It’s no secret that Bitcoin is a volatile asset. As it stands today, volatility is an inherent trait of Bitcoin. Here is a chart of Bitcoin’s 30-day rolling volatility that highlights the wild price swings in Bitcoin.
This volatility makes it extremely difficult for investors to predict when Bitcoin’s price will rise or fall.
It is not necessarily true that individuals who choose the dollar-cost average are not timing the market. By not investing all their available funds at once, they implicitly decide to hold cash, which means they believe that Bitcoin’s price will chop sideways or move down.
These investors hope that by dollar-cost averaging, they can lower their overall cost basis as Bitcoin’s price chops sideways or drops lower. The data above corroborates this, as DCA strategies typically outperform lump-sum strategies during bear markets.
The problem is that most of Bitcoin’s gains historically have occurred in short, explosive movements to the upside. There is a significant opportunity cost to sitting on the sidelines in Bitcoin, which is why lump-sum strategies historically outperform DCA strategies.
There’s an old saying on Wall Street that stocks climb up the stairs but come down on the elevator. However, with Bitcoin, it appears to be the opposite. Most of the time, Bitcoin trades mostly sideways or grinds lower, only to have explosive movements to the upside.
This is likely why holding Bitcoin can feel particularly challenging for investors, given its volatility and the historical behavior of its price movements.
For long-term investors, holding Bitcoin in their portfolio can feel like this.
For long-term Bitcoin investors, there are far more red days than green days, but those few green days are massive. Therefore, investors mustn’t miss these days to capture the gains from Bitcoin’s price appreciation.
The data confirms this. The table below shows the top 15 three-day Bitcoin moves over the last 5 years.
If an investor had invested $100 dollars into Bitcoin on February 1st, 2018, by today, that $100 would be $227.
But if an investor had invested $100 dollars into Bitcoin that same day but missed the top 15 three-day price movements, their original investment would be worth only $15!
In other words, if an investor had missed these 15 largest 3-day periods during this period, their total return was -84.6%. This was when the total return of Bitcoin increased by +127%!
This is likely why DCA, as an investment strategy, has underperformed lump-sum investing in Bitcoin.
With lump-sum investing, an individual is sure to capture all the gains that occur in these periods of explosive price appreciation, whereas an individual who DCAs risks having a portion of their funds still on the sidelines as they allocate over time.
One might scoff at this and say, "Well, when you DCA, you also have a chance of missing big drawdowns, unlike lump-sum."
However, when you look at the data, that is not the case because the risk of missing down days and missing up days is not symmetrical. As we mentioned earlier, the price of Bitcoin tends to move sideways or grind most of the time downwards and then shoot upwards. If you miss these largest green days, the long-term impact on the portfolio's performance is greater than not having exposure to the down days.
When you compare the drawdown risk between strategies, you will find that it actually increases from daily to weekly to monthly DCA strategies.
Below is the drawdown risk for the different DCA strategies compared to the lump sum. The higher the drawdown at risk, the worse it is.
Notice on the chart above how the monthly DCA strategies are not exposed to Bitcoin during periods of low drawdown risk like the daily and weekly strategies. This means that monthly DCA strategies have more exposure overall to periods of high drawdown risk than shorter DCA strategies because they failed to be exposed to Bitcoin during the bear market.
If investors are using a monthly DCA strategy, they will miss the best buying opportunities at the bottom of the bear market. In other words, their average cost basis will be higher than shorter DCA strategies, meaning they will have a higher drawdown risk when the price falls. Thus, investors who DCA over long periods are more likely to see their wealth on paper drawdown more significantly, putting them at greater risk of making poor investment decisions.
This is just another argument for why investors might prefer a lump-sum investment strategy or shorter DCA strategies over longer DCA strategies.
The same trend can be observed when analyzing annualized volatility across the different DCA strategies. The higher the annualized volatility, the more rocky the ride investors experienced using that strategy.
The chart above shows how, once again, monthly DCA strategies all had annualized volatility above 60%. Still, the other DCA strategies had annualized volatility below 60%.
This again highlights how monthly DCA strategies are likely not to be exposed during boring times when Bitcoin’s price is grinding sideways, which makes up most of the time. These periods help dampen the overall volatility of the position. When using monthly DCA strategies, you are more likely to have exposure to highly volatile periods without having exposure to low volatile periods.
Most investors believe that DCA strategies protect them from large downward price movements or high levels of volatility, but this data shows that DCA has not historically provided any significant protection against volatility or drawdown risk compared to lump-sum strategies and that the longer the DCA strategy is, the more drawdown risk and volatility an investor is likely to experience.
Considerations Beyond the Data
This data makes a convincing argument for lump-sum investing when considering an allocation to Bitcoin. It shows that, historically, lump-sum strategies have outperformed DCA strategies, resulting in lump-sum investors accumulating more bitcoin than their DCA counterparts. It also shows that the earlier an investor allocates to Bitcoin, whether lump-sum or by choosing daily DCA over weekly and monthly DCA, the better their return will be over the long term.
Not only that, but this data shows that DCA does not provide any substantial benefit when it comes to protection against downside risk or volatility risk. This is likely due to Bitcoin's price action, which has sharp upward price movements and tends to grind sideways or downward for long periods.
All of this data points to one fact: With Bitcoin, you should invest as early as possible. Waiting hurts because one might miss out on large, short-lived price movements that will make up a majority of one's returns, and these price movements are impossible to predict.
One caveat is that this is all based on historical data. And there's no guarantee that the future will be shaped like the past.
But there is an even larger caveat…lump-sum only outperforms other strategies if the investor can hold their long-term Bitcoin. The main factor in whether or not an investment in Bitcoin is successful is the ability of an investor to hold it long-term to take advantage of its Compound Annual Growth Rate (CAGR). Any strategy that makes holding more difficult for an individual investor will likely result in inferior returns.
Therefore, the best strategy is the one that allows an investor to hold through Bitcoin's volatility and sleep well at night, whether it's DCA or lump-sum. The "right" strategy is unique to every investor regardless of what the historical data says.
Every investor is different. It's easier for investors to sit on their hands and survive Bitcoin's volatility when they are using the right strategy. That's why investors need to tailor their Bitcoin strategy to their own risk tolerance, their own financial situation, and their own conviction level to prevent a stressful situation that could lead to emotional decisions and selling too soon.
In Morgan Housel's fabulous book "The Psychology of Money," he explains that Warren Buffett's net worth today is around $84 billion. Around $81 billion came after he was in his mid-60s. Housel explains, "The real key to his success is that he's been a phenomenal investor for three-quarters of a century…His skill is investing, but his secret is time."
Housel continues…"But good investing isn't necessarily about earning the highest returns because the highest returns tend to be one-off hits that can't be repeated. It's about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That's when compounding runs wild."
Bitcoin's CAGR is compared to gold and the S&P 500 over the last 10 years.
As you can see, the longer an investor holds Bitcoin, the more attractive the CAGR is.
Albert Einstein once said, “Compound interest is the eighth wonder of the world.” This quote holds true for investing in Bitcoin, too.
To date, Bitcoin has provided extraordinary compounded returns for investors. Therefore, when an individual decides to invest in Bitcoin, they should hold their investment for a long time to take advantage of this compounding and consider an investment strategy that allows them to reach that objective, regardless of which investment strategy has historically performed better.
In the end, holding Bitcoin for longer durations is the single biggest factor in whether or not an investor will succeed with their Bitcoin investment. Investors should choose the investment strategy that best suits them to maximize their chances of holding their Bitcoin position in the long term.
Bitcoiners run the numbers. Trust, but verify, below.
Visit thisLink to the Github repo, where anyone can clone, modify, and/or submit a PR for the models above.
