First in a series of overviews on complex investment strategies…
Dollar-cost averaging (DCA) is a widely applied investment strategy that helps to reduce risk by offsetting short-term market fluctuations. It stipulates that although there can be large market swings in the short term, generally speaking, markets follow an upward trend in the long term. Because it is impossible to predict 100% of the time where asset prices will go, making a single large investment at any time can be risky, even if you are applying strong analytical reasoning to the undertaking.
Of course, there can be a good possibility that the value of your acquired assets could increase, bringing you handsome gains; but it is also possible that the price could decrease, meaning that if you decided to sell when the value is down you could be doing so at a loss. Of course, in that scenario, especially with very volatile assets like cryptocurrency, it is often advisable to stay calm and “HODL” as eventually prices tend to rebound, allowing you to earn gains in the long term.
Applying a dollar-cost averaging strategy, however, involves spreading your investment into installments over a period of time. DCA leverages the balance between currency prices and asset prices. When assets (like stocks, funds, gold and other commodities, crypto, etc.) are high priced, your “dollars” will purchase less. When asset prices drop, your “dollars” will buy you more. This ongoing balance allows you to offset losses in times of declining markets, even if the overall dollar value of your investment decreases. In fluctuating markets, you leverage off of the swings that are happening. When markets are enjoying an upward trend, DCA allows you to capitalize on that while mitigating risks.
Looking at long-term historical data we see that even through recessions and market crashes, like the financial crisis of 2007–2008, balanced, consistent investment will tend to bring attractive gains over time.
Forbes offers an excellent explanation of dollar cost averaging as applied to traditional investing:
Dollar-cost averaging works because, over the long term, asset prices tend to rise. But asset prices do not rise consistently over the near term. Instead, they run to short-term highs and lows that may not follow any predictable pattern.
Many people have attempted to time the market and buy assets when their prices appear to be low. This sounds easy enough, in theory. In practice, it’s almost impossible — even for professional stock pickers — to determine how the market will move over the short term. Today’s low could be a relatively high price next week. And this week’s high might look like a fairly low price a month from now.
It’s only in retrospect that you can identify what favorable prices would have been for any given asset — and by then, it’s too late to buy. When you wait on the sidelines and attempt to time your asset purchase, you frequently end up buying at a price that’s plateaued after the asset has already made big gains.
And trying to time the market can really cost you. According to research by Charles Schwab, investors who tried to time the market saw drastically less gains than those who regularly invested with dollar cost averaging.
Source: Forbes: How To Invest with Dollar Cost Averaging
Applying DCA to Cryptocurrency
Dollar-cost averaging is often applied to investment in cryptocurrencies with positive effects as well.
Bitcoin hit an all-time high of $68,789.63 on Nov. 10, 2021. Many will remember the excitement of the time and the growing adoption of this novel asset. Speculation ran wild, with many predicting that BTC would cross the milestone threshold of $100K by the end of that year, so naturally many bought in, riding on the hype and hope of new highs to follow. They didn’t. Instead, BTC went on an extended bear run (drop in value), sinking to less than $16,000 towards the end of 2022.
If you made a single $1,300 purchase of Bitcoin at the end of November 2021, when it was peaking, the value of your asset would have dwindled to around $377 by the end of November 2022 — a loss of over 70%.
If you had instead invested $100 per month into Bitcoin over that same period — a total of 13 installments — the value of your BTC holdings by the end of November 2022 would instead be about $778. So you can see that over some time when Bitcoin fell over 70%, your exposure would have been considerably less with DCA.
What if I Continued?
Conversely, if you had continued your monthly $100 purchase of Bitcoin up until the end of June 2023, your total investment would amount to $2,000, but you would have made a gain of over $300 on it — and that is over a period where Bitcoin lost about half of its value!
This provides a clear example of the potential benefits of dollar cost averaging as relates to cryptocurrencies. Calculating DCA with other major crypto coins and tokens brings similar results.
Diverse Market Conditions Benchmark
The Australian financial services firm AMP Limited has a simple DCA calculator for TradFi on their website, that provides a basic benchmark for three market scenarios — recovery, variable, and rising. We discover from it that applying a dollar-cost averaging strategy has the potential to deliver a profit in all three scenarios, and a lumpsum investment renders a somewhat higher profit only in the rising market scenario.
We inputted a total investment figure of just $2,000, which the calculator divides into five equal installments. Webpage screenshots presented below provide a helpful visual representation of plausible predictions.
Recovery Market Scenario
Variable Market Scenario
Rising Market Scenario
Whale See, Whale Do
Dollar-cost averaging is one clear example of the benefits of applying a diversified investment strategy. The most successful financial experts don’t just “go on a hunch” and bet on gut feelings. They diversify to offset possible losses from all sorts of market corrections, unforeseen factors, and uncontrollable market conditions. This allows them to weather adverse situations with minimal exposure and come out on the other side virtually unscathed. In positive market conditions, diversification bears the potential of even greater gains, through not having “all your eggs in one basket”.
MetFi applies a diversified investment strategy by seeking out a variety of metaverse and Web3 ventures to invest in on behalf of the MetFi DAO community. MetFi employs stringent standards of analysis and scrutiny when considering projects to present to its community, carefully selecting projects with strong fundamentals and a high likelihood of success, all with the intent of realizing our vision of becoming the number one incubator of metaverse and Web3 unicorns.
With an ever-expanding portfolio of partner projects, MetFi differentiates itself from most startups that tend to focus on singular enterprises. A highly diverse range of investments increases the likelihood of success while mitigating risks associated with failure or underperformance. These policies are in place to maximize benefits and long-term growth for the whole community.
Disclaimer: The content of this blog post is for informational purposes only and should not be considered investment advice. The information provided in this article is not intended to be a substitute for professional financial advice, and readers should always do their own research and seek the advice of a licensed investment professional before making any investment decisions.
Further Reading
Web2 Lessons for a Web3 World
VC Stands for Very Calm
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