Dollar Cost Averaging vs Lump Sum Crypto Investing
Eager to invest in cryptocurrency? The growing interest in crypto is prompting many people to consider investing in Bitcoin, Ethereum, Dogecoin, or one of the many other types of crypto out there. One of the most important decisions to make when investing is to decide whether to invest a single, lump-sum in one go or several smaller sums (sometimes known as dollar-cost average crypto) over a period of time.
Here we consider both methods of investing, describing the differences between the two and explaining which option is likely to be right for your needs.
Investing a Lump Sum in Crypto
If you've got a few thousand dollars sitting in a savings account, investing the lot in cryptocurrency is an option that could potentially net you a very nice ROI. In the long-term, most cryptocurrencies do increase in value - Bitcoin, for example, has increased massively in value over the past ten years.
But before you invest that lump sum, there are three key variables to be aware of:
The Crypto Market is Very Volatile
If you look at a graph that shows the growth in value of crypto over the years, it's marked by some enormous peaks and troughs. This means your investment could quadruple in value in a few short months, then plunge to far less than you paid for it almost overnight.
The crypto market is heavily influenced by random external events - from electricity blackouts in China to the activities of large crypto investors, prices can vary enormously in a short space of time.
If you're an investor that likes a degree of security and certainty in your portfolio, a lump sum in crypto may provide a higher degree of exposure and risk than you're comfortable with.
As a rule of thumb, you shouldn't invest a whole lump sum in crypto unless you are comfortable losing it all.
The Crypto Market is Still New
Nobody can predict the future, but investing in well established products, like diversified stock ETFs, bonds, or even gold, is widely considered to be a low-risk choice. This is primarily because of the diversification you can get through broad funds and the long history of average returns you can expect.
In contrast, crypto is still a relatively new investment option, so commentators have limited data on which to draw when it comes to predicting how it will behave in the future. There are all sorts of unknowns that may cause crypto prices to plummet (or, rise astronomically).
Investment Patterns are Different to the Norm in Crypto
Most investment products are owned by many investors, some of whom will have invested a large sum and others a small one. In contrast, a large percentage many crypto projects can be owned by a relatively small number investors.
This is another reason why the crupto market is so volatile—if one of these mega investors sells a large chunk of their coins, it will have a disproportionate effect on the market value.
In summary, investing a lump sum in crypto is a high-risk strategy that may yield high rewards or, especially if withdrawn at the wrong time, fail to deliver a satisfactory ROI.
DCA Crypto Strategy
A crypto dollar-cost averaging strategy involves making regular, small investments in one or more different products, with little regard to what the market is doing. Rather than the "all your eggs in one basket" approach of investing a lump sum, dollar-cost averaging means spreading the risk over time.
The idea behind DCA is that over time, any disbenefits that occur by "buying high" will be outweighed by subsequent rises in the market, as well as the large ROI that bitcoin bought when the price was low will generate.
Factors to consider when adopting a DCA crypto strategy include:
Ideal for People Without a Large Amount of Cash
Whilst some people do have larger sums available, perhaps due to an inheritance or the sale of a significant asset, many other people only have smaller sums available to invest. The DCA strategy can be used by investors from many different financial backgrounds.
Less Risky Than a Lump Sum Investment
As investments are spread over time, the volatility of the overall investment amount is likely to be less. If you're a more cautious investor, DCA provides added security and makes it easier to live with the inevitable level of risk that the crypto market generates.
Paying More Fees
In most cases, you will need to pay a fee when you complete a transaction. As DCA involves making numerous small transactions, it's likely you'll pay more fees than an investor who buys one lump sum of bitcoin, then leaves it to appreciate.
That said, DCA is a long-term wealth creation strategy, so if you pursue it for long enough, the ROI is likely to be rewarding, even allowing for the fees you need to pay.
Crypto Lump Sum vs DCA
The reality is that one form of investing isn't necessarily better than the other. Lump-sum investing has the possible potential to deliver a higher ROI, provided the timing of both the deposit and the withdrawal is right. That said, this positive outcome hinges on the future performance of bitcoin mirroring previous performance. The unknown nature of the crypto market means there's a big question mark over whether future performance is going to be anything like the growth we've seen to date.
If you had invested using a DCA strategy in the past ten years, you would have realized a lower ROI than if the same amount had been invested initially as a lump sum.
That said, if a lump-sum investor isn't spot on with the timing of their investment, or if they withdraw at the wrong time, they stand to lose a bunch.
A DCA strategy carries a lower level of risk. As it's a long-term strategy, provided the crypto market continues to perform as it has been, it's likely that a DCA investor will enjoy a moderate return over the longer term.
All other factors being equal, if you have a conservative approach to risk, DCA is probably going to work better for you. Investors who are less risk-averse may like to try the lump-sum crypto investing strategy.