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Dollar-cost averaging is a strategy, not a belief! Even the stock god Warren Buffett advocates for the averaging method. Is it equally effective when applied to Bitcoin?

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Dollar-cost averaging is a strategy, not a belief! Even the stock god Warren Buffett advocates for the averaging method. Is it equally effective when applied to Bitcoin?

The dollar-cost averaging strategy, also known as regular fixed-amount investing, is an investment strategy advocated by the legendary investor Warren Buffett, and has shown significant effectiveness in financial markets. However, based on data from the past decade, the same strategy applied to Bitcoin (BTC) has also been equally effective.

Buffett's Advocated Dollar Cost Averaging

Over the past seven months, the stock market has not performed as well due to the impact of the pandemic. Even after a rebound following a major drop in March, the stock market faced significant sell-offs in recent months as the US and Europe entered a second wave of the pandemic. With the US presidential election approaching, more market turbulence may be expected.

For investors concerned about finding entry points in such challenging times, Dollar Cost Averaging (DCA) may be a worthwhile investment strategy to consider. The so-called "Dollar Cost Averaging" is essentially "regular investment," where investors divide the total amount to be invested into several parts and make purchases at regular intervals. The theory behind this investment strategy is that when assets rise or fall, investors can mitigate the impact of price fluctuations on their capital and benefit from it. Buffett has long advocated the use of Dollar Cost Averaging as an operational strategy for indices such as the S&P 500.

Interestingly, data from the past decade shows that the same strategy applied to Bitcoin (BTC) is also effective.

Data Speaks

The following is the result calculated by a Bitcoin dollar-cost averaging platform. If an investor had been buying Bitcoin at an average cost of $100 per week since January 2014, the total expenditure would have been $35,700. The return rate would be 1,636%, with a profit of around $589,000.

Source: Bitcoindollarcostaverage.com

On August 6th this year, when the price of Bitcoin reached $11,744, researchers at CoinMetrics stated that investors who had been purchasing Bitcoin using the dollar-cost averaging method since Bitcoin hit its high of $20,000 in 2017 would have gained a return of 61.7%. The CoinMetrics researchers said at the time:

"Although Bitcoin is still 30% lower than its all-time high (ATH), starting from the market peak in December 2017, employing the dollar-cost averaging strategy would result in a 61.8% return on investment, or 20.1% annually."

Since then, the price of Bitcoin has risen from $11,744 to $14,100 within three months, marking a 20% increase, significantly boosting investors' average returns.

Furthermore, a data analysis released by Glassnode on October 22nd indicated that 98% of all Bitcoin addresses were in a profitable state, based on the platform's analysis of Bitcoin's input time and purchase price at that time.

This data once again proves the feasibility of applying Dollar Cost Averaging to Bitcoin.

Suitability on Fundamentals

From a fundamental perspective, there are many reasons why Bitcoin is suitable for long-term dollar-cost averaging. Firstly, Bitcoin is a nascent store of value, but compared to the market value of gold, it still has significant room for growth. Additionally, institutional demand for Bitcoin in 2020 has increased significantly, a trend that will help drive further long-term value growth for Bitcoin.

Furthermore, compared to traditional financial assets, Bitcoin experiences more significant price fluctuations. Therefore, from a long-term investment perspective, spreading the cost of buying Bitcoin through Dollar Cost Averaging is a lower-risk and more stable investment strategy.