Dollar cost averaging (DCA) has become a key strategy for investors navigating the “unpredictable realms” of digital assets, according to an update shared by Coin Metrics.
Coin Metrics explains that this approach “involves regularly investing a fixed amount, regardless of the current market cycle—a simple yet powerful strategy that contrasts starkly with the risk and stressful experience that investing in volatile assets can bring to novice investors. Because of this, DCA is often espoused as a pragmatic way to manage investment risks.”
The Coin Metrics report further noted that “increasing access to market data and a deeper understanding of these dynamics now allows for a more informed application of DCA.”
According to Coin Metics, while it’s important “not to rely too heavily on any single strategy in fluctuating markets, DCA provides a useful tool for investors looking to mitigate the impact of market volatility.”
In the State of the Network report, Coin Metrics aim “to evaluate how dollar cost averaging has performed across the digital asset market, highlighting its role and effectiveness in today’s investment landscape.”
Evaluating Performance During Bull and Bear Markets
Assessing any investment’s merit “involves a careful analysis of its risk-adjusted returns, comparing various assets and strategies.”
Coin Metrics added that we can also “evaluate how well DCA may serve as a stabilizing factor for those seeking to lessen the sting of market swings.”
As mentioned in the update, DCA has “performed relatively well, although perhaps not as well as we would have expected.”
They notice that although there “are a few notable outliers, around 60% of the assets they tested are below the breakeven threshold value of the cash invested.”
Coin Metics added that “investing in quality assets is equally important when doing DCA, even if the volatility of our portfolio is lower.”
Return Performance Since 2021
Dollar cost averaging (DCA) is frequently “recommended as a strategy for investors who might find it challenging to stay disciplined during the fervor of a bull market—a scenario where even experienced investors can incur losses amid the crypto market’s volatility. Most new investors make their first investment during a bull market, driven by heightened emotions and a pressing fear of missing out.”
As stated in the report, “the majority of assets have not fully recovered to the point where daily DCA would prevent an investor from taking losses. This highlights the need for caution when considering entering the fray during a bull market, emphasizing that prudence does not always equate to protection from the market’s uncertainties.”
The report further revealed that 2023 has “marked a rejuvenating phase for digital assets, hinting at the onset of a potential new bull market, especially with the anticipated Bitcoin halving event in 2024 drawing near.”
This upswing has buoyed prices “across the board, a trend clearly reflected in the chart presented below. It also serves as a reminder that while some assets may experience substantial appreciation, others may see more conservative growth, with a significant number not reaching the breakeven point of their initial investment when excluding the top performers.”
Top Performing Assets
As noted in the update, “even among highly-capitalized assets, DCA portfolios can lag behind their equivalent cash value. It’s evident that the top earners stand out—with SOL leading the way, closely followed by MATIC—having yielded returns of 252% and 184%, respectively, over the modeled DCA portfolios.”
Notably, a significant portion of these frontrunners “are recent market entrants. Among them, APT stands out, trading at an impressive 194 times the cash equivalent of the investment, which is approximately $10.6K.”
As noted in the update, “although the returns of the top portfolio seem enticing, it isn’t a realistic or complete view of the market, we should also look at the worst-performing assets.”
The Coin Metrics report concluded:
“The examination of dollar cost averaging (DCA) within the digital asset market has shown that DCA helps manage volatility but does not assure positive returns. The varied outcomes, particularly the underperformance of many assets despite a disciplined investment approach, emphasize the strategy’s limitations. DCA, while mitigating some risks, is not a one-size-fits-all solution, nor is it immune to the market’s complexities. In practice, investors need to incorporate trading fees and determine the best exchange(s) to execute their orders on.“