Warren Buffett has a message for young investors: the average dollar cost in major stock market indices. However, data shows that the same strategy has worked quite well for Bitcoin (BTC) over the past decade as well.
The term dollar cost averaging, or DCA, refers to a strategy in which an investor divides the total amount to be invested in regular purchases of that particular asset. The theory behind this investment strategy is that if an asset goes up or down, investors can take advantage of both to reduce the negative effects of price volatility.
Buffett has long expressed optimism about the averaging of the dollar cost in stock market indices. The “Oracle of Omaha” in particular likes the S&P 500 index funds and the averaging of the dollar cost in the index.
However, data shows that the same strategy has proven efficient for Bitcoin in recent years. Over the past decade, Bitcoin has seen 100% annual growth for five years. Additionally, 98% of Bitcoin addresses are currently in a winning state.
The average cost in Bitcoin works, as history shows
For example, if an investor had cost an average of $ 100 in Bitcoin since January 2014 and spent a total of $ 35,700, they would have returned 1,648%, or around $ 589,000.
Additionally, the price of Bitcoin was $ 11,744 for Binance on Aug 6. At the time, researchers at CoinMetrics said if an investor averaged the dollar cost in BTC since its high of $ 20,000, they would have made a profit of 61.7%. They write:
“Although #Bitcoin is still trading 30% below ATHs, the average dollar cost from the peak of the market in December 2017 would have produced a return of 61.8%, or 20.1% per year.”
Since then, the price of Bitcoin has risen from $ 11,744 to $ 13,840 in three months, up 17.9%. The average return of an investor whose dollar cost has averaged BTC since peaking at $ 20,000 is now much higher.
There are several reasons why investing in Bitcoin has worked for a long time regardless of price volatility. One of them is that Bitcoin is an emerging store of value that is tiny compared to gold.
Over the course of 2020, Bitcoin has seen a significant surge in institutional demand. BTC is compelling for institutions because it is a hedge and a potential investment that can lead to exponential growth at the same time.
Averaging the dollar costs worked for Bitcoin, as BTC can have extreme correction phases. But during bull runs, when infrastructure and fundamentals improve significantly and there is an institutional buzz, their value can rise rapidly.
For example, the price of Bitcoin on major exchanges fell abruptly to just $ 3,600 in March 2020. As of November 1st, the price of BTC is over $ 13,800, more than triple since then.
Most of the BTC addresses are already profitable
Glassnode analysts found that 98% of all Bitcoin addresses are profitable. You can find this statistic by analyzing when BTC first entered an address and evaluating the price at which BTC was purchased. They declared:
“98% of all # Bitcoin UTXOs are currently in a winning state. A level not seen since December 2017 and typical of previous BTC bull markets. “
With an asset that has the potential to grow exponentially, high risk strategies could be difficult to manage. Hence, averaging the dollar cost is usually a convenient and efficient way to turn to BTC.