Friday , November 27 2020

Warren Buffett praises the “average dollar cost” for investing in stocks, but does this also work for bitcoin?



Warren Buffett has a message for younger investors: the average dollar cost of major stock indices. However, the data show that The same strategy has also worked very well for Bitcoin (BTC) in the past decade.

The term average cost dollar, or DCA, refers to a strategy when an investor divides the total amount to be invested in periodic purchases of a given asset. The theory behind this investment strategy is that when an asset goes up or down, investors can benefit from reducing the negative impact of price volatility.

Buffett has long expressed optimism about the average dollar cost of stock indices. Specifically, the “oracle of Omaha” likes the funds of the S&P 500 index and the average dollar cost of the index.

But the data indicates that the same strategy has proven to be very effective for Bitcoin in recent years. For five years in the past decade, Bitcoin made 100% profit per annum. Further, 98% of Bitcoin addresses are currently in the profit zone.

History shows that the average dollar cost in Bitcoin works

For example, If someone had decided to invest an average of $ 100 in Bitcoin since January 2014 and their total investment had reached $ 35,700, they would have obtained a return of 1,648% or about $ 589,000.

Example of average cost performance in dollars. Source: Bitcoindollarcostaverage.com

In addition, on August 6, the price of Bitcoin was $ 11,744 at Binance. At this moment, CoinMetrics researchers said that an investor’s average dollar cost, averaged over BTC, from its $ 20,000 high, would have returned a 61.7% gain. They wrote:

“Although #Bitcoin is still trading 30% below ATHs, the average dollar cost since the market peak in December 2017 would yield 61.8% or 20.1% per year.”

Since then, Bitcoin’s price has gone up, from $ 11,744 to $ 13,840, up 17.9% in three months. The average return for an investor who decided to apply this strategy from the peak of $ 20,000 is now substantially higher.

There are several reasons why investing in Bitcoin for a long time has worked, regardless of price volatility. One includes that Bitcoin is a small reserve rising in value compared to gold.

Throughout 2020, Bitcoin saw a considerable increase in institutional demand. BTC is attractive to institutions because it is a safe haven and a potential investment that can generate exponential growth simultaneously.

The dollar cost averaging strategy worked for Bitcoin because the BTC can have extreme corrective phases. But, during bullish cycles, When infrastructure and fundamentals improve significantly and institutional insanity occurs, their value can increase rapidly.

For exampleIn March 2020, Bitcoin’s price fell dramatically to just $ 3,600 on major exchanges. As of November 1, the price of BTC is above US $ 13,800, more than three times since then.

The daily chart of last year’s Bitcoin price. Source: TradingView.com

Most BTC addresses are already making gains

Glassnode analysts found that 98% of all Bitcoin addresses are in the profit zone. They deduced this statistic analyze when BTC first enters an address and evaluate the price for which it was purchased. They explained:

“98% of all #Bitcoin UTXOs are currently in a profit position. A level not seen since December 2017, and typical of previous $ BTC bull markets. “

With an asset that has the potential to see exponential growth, high-risk strategies can become difficult to manage. Therefore, Average cost in dollars is usually a practical and efficient way to approach BTC.

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