Last month, my roommate introduced me to the concept of Dollar Cost Averaging (DCA) in the context of Bitcoin with great enthusiasm. According to this strategy, consistently purchasing a fixed amount of Bitcoin every month would yield greater profitability compared to making a single lump-sum investment. Intrigued by this notion, I embarked on a quest to investigate and delve deeper into its potential advantages.
Methods
For this exploration, I employed Python along with the libraries Streamlit and Plotly. Although my implementation in Python and the accompanying mathematical calculations are quite elementary, they serve the purpose of illustrating the concept. The calculations provided are written in pseudocode to demonstrate the assumed process of investing a fixed amount, monthly_sum, each month.
for each month:
number_of_bitcoins_of_the_month = monthly_sum / rate_of_that_moment
total_bitcoins = total_bitcoins + number_of_bitcoins_of_the_month
total_invested = total_invested + montly_sum
# at the end
current_value_usd = total_bitcoins * current_rate
rendement = (current_value_usd - total_invested) / total_invested *100 %
number_of_years = number of days / 365
rendement_per_year = (current_value_usd / total_invested) **
(1 / number_of_years) - 1) * 100Graph Generation
The graphs illustrating the annual returns can be generated using the online tool available at https://rcsmit-streamlit-scripts-menu-streamlit-fiaxhp.streamlit.app/?choice=20.
Script Repository
The script used for the analysis can be accessed on the GitHub repository at https://github.com/rcsmit/streamlit_scripts/blob/main/dollar_cost_average.py.
Results
Our analysis reveals the performance of DCA under various starting points.
Upon analyzing the data, it becomes evident that the annual returns were predominantly positive for most periods, with the exception of a notable downturn observed from September 2020 until May 2021. During this particular timeframe, the returns were negative, indicating a period of decreased profitability.
When comparing the Dollar Cost Averaging (DCA) strategy to a lump sum investment approach, such as investing $3100 at once on January 1st, 2021, it is observed that DCA outperformed during the period from February 2021 to July 2022.
This can be attributed to the fact that the Bitcoin exchange rate during that period was higher than the current rate. Consequently, by consistently investing a fixed amount each month, DCA resulted in greater profitability compared to a lump sum investment made at a single point in time.
Conclusions
The analysis indicates that it is more advantageous to opt for a lump sum investment when the Bitcoin exchange rate is on an upward trajectory. This is because the purchase price would be lower than the average buying price attained through the DCA strategy, and vice versa.
Notably, since 2017, there were only 9 months where initiating DCA proved to be disadvantageous, whereas a lump sum investment was not profitable from January 2021 to June 2021, spanning a total of 18 months. During this period, the Bitcoin exchange rate remained consistently above the current rate of approximately $30,000.
However, it is worth mentioning that, overall, purchasing lump sum investments tended to yield higher returns in most instances.
Remarks
Additionally, it is important to consider the individual investor’s risk tolerance and investment objectives when deciding between DCA and lump sum strategies. DCA provides the advantage of mitigating the risk associated with market volatility by spreading the investment over a period of time. This can be particularly beneficial for those who are risk-averse or uncertain about the market’s short-term direction.
On the other hand, a lump sum investment allows for immediate exposure to the market and the potential for higher returns if the market continues to rise. However, it also carries the risk of investing at a less favorable time if the market experiences a downturn shortly after the investment.
Moreover, the choice between DCA and lump sum investment strategies can depend on the specific market conditions and the investor’s ability to time the market effectively. It is difficult to predict the future movements of the Bitcoin market accurately, making it challenging to determine the optimal strategy in advance.
Ultimately, investors should carefully evaluate their financial goals, risk tolerance, and market outlook when deciding between DCA and lump sum investment strategies, considering both the potential benefits and drawbacks associated with each approach.
Disclaimer
The information provided in this discussion is for educational and informational purposes only. It should not be considered as financial or investment advice. Investing in cryptocurrencies, such as Bitcoin, carries inherent risks, including but not limited to market volatility and potential loss of capital. The performance and outcomes described in this conversation are based on hypothetical scenarios and historical data, which may not be indicative of future performance. Before making any investment decisions, it is essential to conduct thorough research, consult with a qualified financial advisor, and carefully consider your own financial situation, risk tolerance, and investment objectives.
Notice
The text is written in basic English by the author and rewritten by ChatGPT. Remarks and disclaimer are generated by ChatGPT. (*)
The illustrations were produced utilizing MidJourney.