"Dollar-cost averaging" in the cryptocurrency world: Does it really guarantee profits without losses? Investment performance may not be as impressive as imagined!

Are you also a fan of Dollar-Cost Averaging when buying and selling cryptocurrencies? Cryptocurrency writer Mark Helfman recently wrote an article titled "Stop Dollar-Cost Averaging into Bitcoin", analyzing whether this investment strategy can bring good performance to investors.

What is Dollar-Cost Averaging?

Dollar-cost averaging may sound intimidating, but most people are familiar with the concept of regular investments. Simply put, investors regularly purchase the same amount of assets. For example, investing $100 in Bitcoin at the beginning of each month, or $20 in ETH every Monday.

This investment method is advocated by many investment advisors as it can effectively average costs and reduce the risk of being stuck at high points. When prices fall, investors receive additional Bitcoin. When prices rise, the existing Bitcoin becomes more valuable.

However, when we look back at the performance of using this method over the past year, it seems less than ideal.

Opportunity Loss

Opportunity loss refers to the loss incurred when the current plan's returns are less than the potential returns of the abandoned plan, which is the opportunity cost of the current plan.

Looking back at the Bitcoin prices over the past year, Bitcoin rose by about 60% in 2021, with an average daily cost of $47,400, but the year-end price was $46,100. What's worse is that the current price is even below $40,000. Those who use dollar-cost averaging typically believe that this method is better than impulsive trading, and investing this way is stress-free, worry-free, and not overly meticulous.

However, at the same time, there is no gain. Bitcoin rose by 60% last year, yet your return on investment is negative.

Nevertheless, Bitcoin's increase in 2022 is relatively less compared to other years. But even in years with more significant increases, dollar-cost averaging still cannot bring significant performance to investors.

It might have worked ten years ago; perhaps five years ago; not now.

The chart below shows the investment returns using the dollar-cost averaging method for Bitcoin since its inception, with returns decreasing exponentially each year.

What About Applying This to Altcoins?

Using profits from altcoins to offset losses might be a good choice, as the entire altcoin market surged 5 times in 2021. Since the bull market began in December 2018, it has surged 30 times.

The increase in altcoins may indeed be more prominent compared to Bitcoin, but there are various types of altcoins. How can one ensure choosing the right one? Applying dollar-cost averaging to a dying altcoin will likely not yield good returns. Among the top 50 coins by market capitalization, many coins have remained stagnant without market attention. Bitcoin, on the other hand, will never fall into this category.

If an investor does manage to pick a top performer among altcoins, they must also avoid various threats in the speculative and highly competitive cryptocurrency market, such as rug-pulls and pump-and-dumps.

From one market peak to the next, altcoins have not outperformed Bitcoin. At most, altcoins perform better than Bitcoin during specific time periods between peaks. When investors apply dollar-cost averaging to altcoins, they may end up investing in coins that will forever lag behind the entire market.

A Simple Alternative Method

Mark Helfman has proposed an investment method that differs from dollar-cost averaging but is relatively simple in concept. Only buy during bear markets and let assets grow naturally using savings platforms during bull markets.

Based on the trend chart of Bitcoin, there are significantly more periods of growth than decline, with declines typically being larger and faster. That means buying only during a few months of bear markets and ceasing purchases when the market has been in a prolonged uptrend, allowing assets to grow naturally. Additionally, during bull markets, some work income can be converted to stablecoins and placed in centralized exchanges or DeFi platforms with savings functions to enjoy 7-20% interest.

However, while this method seems logical, determining whether the market is in a bear or bull phase requires investors to accumulate a certain amount of investment experience over time.