It’s fashionable in bitcoin circles these days to join the DCA army: for a dollar cost, your average bitcoin savings. If you hoard a little at a time, even small amounts like $1, $5, or $10 a day, you can grow your inventory into very impressive fortunes. It makes the ride smoother, and it overcomes the psychological barrier of buying (what seemed like two minutes ago) at very high prices.
DCAing is an investment strategy that Bitcoin inherited from the world of traditional finance – and it’s totally wrong.
First, let me offer a few caveats: I adore Haas McCook. His articles, particularly those on energy use, are amazing. I don’t dispute his conclusion that the DCA army would be good for stabilizing the Bitcoin network and for getting the SAT in strong hands. Most people do not have the courage to take the risk of buying a top with everything they have. And even for many of us, the psychological commitment device of repeating one small thing every day turns dreaded saving decisions into routines.
But as an investment thesis on top of a structurally moving asset, it doesn’t make sense. Most people have heard investment jokes by people like Warren Buffett or Ken Fisher say “time in a Market beats tima job market; “Having an existing stock of savings dollars in bitcoin over a certain period of time intentionally delays your time in a Market in exchange for avoiding horrific possibilities Illmarket timing.
Then let me unleash my paradoxical nature for a minute and say the following: If you had a pile of money about to go into an appreciative assetAnd DCAing Psychologically calming but mentally stupid.
The Virtues of Calculating Average Cost in Dollars
As with many things, we often give practical advice for beginners that the professionals don’t follow. Sometimes we give advice that is not literally true, but it gets the job done and gets the novice over the first hump. We teach people who aren’t familiar with guns to always treat them as loaded and unsafe, even when we know they aren’t; We instruct children to follow their swings in baseball or golf strokes, despite what they do after hitting the ball I can not No effect on the trajectory of the ball.
Something similar comes into play in moving an increasing amount of your assets into bitcoin: it makes great sense and goes back to the well-thought-out diversification strategies of old finance.
The virtue of an average dollar cost of investing over time is twofold. First, DCAing allows for a smoother ride: you buy when it’s cheap, you buy when it’s expensive, which means that over time you get a decent cost basis – without having to know when it is. This calms people’s nerves, makes them comfortable with price fluctuations, and adjusts their emotions so they don’t deviate from a strategy that works well over time.
Second, you avoid the psychologically traumatic experience of buying with everything you have before a 30-50% reversal occurs. These are painful, and bitcoin’s past has a few of them. The mistake of lump-sum purchases before such reversals occur looks like a throw. Much of money straight down the drain. You immediately lost a large part of your savings. To make matters worse, had you only waited a little while, you could have bought coins at a huge discount. ouch.
But these are unrealistic fears. The whole reason we think of DCA is because we The market cannot be timed. we don’t You know when those terrifying setbacks come, so calculating what it would have been if we were omniscient is an exercise in the unreal. This is not an option available to us humans.
Some numbers to illustrate the problem
Let’s use some old financing returns to show the problem. Jeremy Schneider at the Personal Finance Club owns a calculator running on S&P 500 returns dating back to the late 19th century. This US stock index serves as a comparison to bitcoin because, like bitcoin, it is a volatile price journey in a structurally uptrend.
Almost no matter what numbers you put into these calculators, you can’t get a DCA strategy to outperform your total purchase more than 35-40% of the time. DCA only earns when your lump-sum purchase occurs just before the big market crash. In every other scenario, with sufficiently long investment horizons, the purchase wins a lump sum.
Writes Moneychimp, which offers a similar calculator
“The average cost dollar would win if the start date fell just before a dramatic crash (like October 1987) or at the start of a 12-month total recession (like most of 2000). But unless you can predict these downturns early on, you won’t have Scientific reason to believe that a dollar cost averaging will give you an advantage.”
Let’s do the same exercise on Bitcoin. Connecting Hass McCook’s suggested $10 daily purchases over the past five years on DCAbtc.com, we got $18,260 invested for a total portfolio value as of late August of nearly $260,000—a return of just over 1300%:
Compared to a 56% gain in a similar plan to the S&P 500 DCA, that’s pretty good.
But five years ago, Bitcoin was trading at $568.40. A total purchase of $18,260 would have given you over 32 full coins, with a total value today somewhere north of $1,500,000. That’s a return of 8,400% – well above the 1,300% profit that the DCA plan brought back. Buying the lump sum wins, because it didn’t happen right before the big crash but before a few major bullish cycles.
If you had a bad timing to buy bitcoin in early December 2017, you would have had a buy price of between $9,000 and $16,000 in total returns to date, now a return of between 202% and 437%. Not terrible, but a little less than what a DCA plan starting at the time would give you – 452%.
Inconsistency between ups and downs
If you have the foresight (or arrogance) to believe that you can time the market and determine when to sell bitcoin on the cheap, you don’t need any of these strategies; Simply run the formula you think you’ve discovered. Of course, you would probably be wrong because almost no one is able to tell when any market is – at least not often enough and consistent enough to distinguish it from luck.
The rationale for DCAing in any origin is that we cannot predict the future: we don’t know How do to market timing. There will be shocks to the price of any asset, both up and down. But if our thesis about bitcoin’s supremacy is correct, these shocks will rise more than they fall. If you wait and delay in your purchases – and this is the essence of DCAing – you are more likely to expose yourself to missing out on upward shocks rather than protecting yourself from downside shocks.
If you think a dollar is a melting ice cube And If you believe that your target asset is in a choppy flight with an uptrend, you will suffer more from the opportunity cost of waiting to enter than the real loss of buying at the (local) top. Both are a loss: one feels more real than the other. Dollar cost averaging is a hedge against entering into fairly symmetrical trades. as entry to the top asymmetric Trade, it’s a losing proposition.
If you deviate from the DCA rule, and think “I will wait for a pullback and an opportunistic buy when the price is cheap”, you may wait forever. More importantly, you’re already back in the mindset of trying to time the market – but without the rules, safety mechanisms, and analytical tools to actually do it. You are like a central banker, refusing to respect rules that you know work best over time, setting them aside to trust your gut feeling, or setting policy on a whim, or on intense fears, or the existing bias and action bias that most people feel subject to.
Even if you haven’t been sold on my disagreement yet, keep in mind that most people’s finances are structured for DCAing anyway: you earn a monthly income, and the more your convictions remain or reinforce, the more you will likely accumulate with whatever future surplus you can You get it by spending less than you earn. Unnecessarily increasing your DCA, out of the dollar stock you already hold, doesn’t align with what you say you believe in.
Investing above a structurally upward trajectory, a positive-sum game, skews risk in favor of entering early (again, ‘time’ in a Market…”). In exchange, DCAing acts like insurance: You protect against the worst negative outcomes, but you pay dearly for it by giving up most of the big rally you say is coming.
If you believe that you are in control of your investment decisions and can withstand the psychological pain of external events (buying, say, $64,000 before falling 50% this year), then the best strategy is to buy as much as possible, as soon as possible. You can also. Ironically, the more optimistic you are about Bitcoin’s (long-term) prospects, the better you can look at DCAing.
Facilitate your purchases over time if it makes you sleep better at night, but for superior long-term performance it’s best to sink your head first into the deep end.
This is a guest post by Joakim Book. The opinions expressed are their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
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