December 22, 2024
A no-fail trade? Bitcoin traders who dollar-cost average are profitable

The weighted average cost of buying Bitcoin has recently reached a level that means that all investors who have been consistently buying the leading cryptocurrency at a dollar cost average are now profitable, no matter how long they hold.

The news came even as the bitcoin price in U.S. dollar terms is still down more than 50 percent from its all-time high of around $69,000.

However, many financial experts in the field remain convinced that Bitcoin’s (BTC) entire existence and nearly $600 billion market cap is based on some sort of Ponzi scheme. Others continue to deny that saving in the most difficult form of money known is by far an excellent investment thesis — that it outperforms all others.

Yes, there may be risks. Yes, volatility certainly accompanies the field. But looking at these factors in isolation doesn’t do an adequate analysis of any investment. Available alternative strategies must be considered along with other variables such as:

  • What is the current macro environment? How might the future change? What impact might this have on different asset classes and their performance?
  • What is the risk/reward ratio offered by one strategy compared to other strategies?
  • Does diversification lead to an optimized risk/reward profile, or does YOLO’s all-in offer better returns?

These are just some of the potential issues that might be worth looking into when it comes to the arguments against long-standing dollar cost averaging (DCAing) of BTC.

Bitcoin is superior to traditional investments

Some investors, like those at Adamant Research, have pointed to the reality of Bitcoin’s most favorable risk/reward ratio for years:

“We assert that Bitcoin’s long-term risk-reward profile is currently the most favorable of any liquid investment in the world. We expect it to trade between $3,000 and $6,500, after which we expect a new bull market.”

The group made similar statements during the 2015 and 2011 bear markets.

How has the standard 60/40 portfolio performed over the past five years? What about gold? real estate?

The chart below provides a good illustration of the relative performance of several currencies and asset classes against BTC:

Needless to say, when it comes to comparing the performance of a Bitcoin DCA strategy with any other asset, there is very little that compares.

To diversify or not to diversify?

Traditional asset managers tend to follow certain rules, one of which is the idea of ​​rebalancing. According to this line of thinking, when a particular asset outperforms, the profits should be taken and distributed elsewhere.

Arguably, it can be seen as a form of “dynamic” diversification. But whether diversification is discussed from the beginning of portfolio construction, or over time, how does this strategy compare to going all-in on what is by far considered one of the riskiest and most speculative assets of all time?

The answer is simple: To do so, as investor Michael Saylor said, is to “sell the winners and buy the losers.”

On a five-year basis, BTC/USD is up 376%. That compares to about 55% for the S&P 500 or gold.

5-year chart of BTC, SPY and gold. Source: TradingView

Taking profits from Bitcoin and investing them in other assets at any time can diminish the potential of a portfolio. Dividend income doesn’t compensate except for those with multi-million dollar portfolios. Even so, the potential income would pale in comparison to the capital gains of holding a large Bitcoin position.

While the notion of “risk” often connotes volatility and potential downside risk, what about the risks associated with “practising”? Shouldn’t investors be concerned about the possibility that their portfolios are barely keeping up with inflation?

related: CPI Meets Low Bitcoin Supply – 5 Things You Need to Know About Bitcoin This Week

Macro Trends to Consider

Proponents of Bitcoin and the DCA strategy have long argued that Bitcoin is the ultimate hedge against monetary inflation and overall financial market uncertainty.

Despite the best efforts of critics to try to destroy this narrative, it has prevailed.

Just look to the 2023 banking collapse and Bitcoin’s resulting rally for proof. Furthermore, while the “inflation hedge ends here” narrative became popular in 2022 as BTC plummeted from all-time highs, the idea seems oddly put on hold in 2023.

BTC/USD YTD chart. The vertical lines indicate the dates of the Silvergate crashes. Source: TradingView

When it comes to printing money, there is perhaps no better-known cryptocurrency meme than “money printing machine go brrr.”

A big reason why the meme is so successful is the truth behind it: since its inception, the growth of the M2 money supply has been highly correlated with the price of BTC/USD.

Despite the recent downward trend in the money supply and velocity of circulation, there is no reason to believe that the magic money printing machine is gone. More likely, it’s just been dormant for a while.

Steadiness and stability are the key to winning the game

For many Bitcoin and cryptocurrency cynics, no amount of evidence can change their beliefs. In their view, once a Ponzi scheme, always a Ponzi scheme. But the bearer has taken the orange pill and seen the truth, while being justly rewarded.

While Bitcoin supporters can invite others to join the cause, no one can impose a worldview on others. Even if this view has long since become self-evident.

BTC is up 87% so far this year. Still, the price is 44% below its all-time high of $69,000. We are less than a year away from the next halving, which is expected to happen in May 2024.

Following this event, and the prospect of increased institutional adoption in the near future, it is widely expected that Bitcoin price could reach six figures or even higher during this cycle.