I'm not great at investing, if I was I wouldn't be writing about this on Leo, I would be drinking mojitos in Bali for the 7th consecutive June with my family.
But I'm slowly getting better at it. One of the perks of working from home in two part time jobs that are related to crypto, finance and research, is that everything I do from the moment I wake up until the moment I go to bed to re-watch game of thrones with my girlfriend, improves my position in the cryptospace one way or another, and my knowledge about investing and finance grows, and I'm no longer the graduate with an intermediate understanding of economics and finance.
I guess my point is that I'm getting to that point of being great at investing, which is why, whenever I see some ideas that might be useful for the rookie investor or the average Hiver that wants to improve, I try to make a post on Leo simplifying the concepts and making the environment of the topic as easy to understand as possible - there will be time for mojitos one day.
Dollar cost averaging vs Lump Sum investing
You might have heard of the first term, every sound crypto - and stock - investors talk about DCA when Bitcoin investment comes out in the conversation, but I'm willing to bet my ass that at least one of the three people reading this post hasn't heard of the second term.
Dollar cost Averaging
For the uninitiated, Dollar cost averaging is an investing strategy that in order to minimize risk and volatility, an investor builds their position - that means buying an asset or a token - over a large amount of time, and they do so at a set time of the month, the week or the trimester, but always at the same time. For example, instead of trying to time the bottom of ethereum in a span of 5 months, or getting stressed about when to use those 10k dollars, a DCAverager just buys 2k worth of ETH every 1st of the month from January to May. Let's put that example to the test:
If I had bought 10k USD worth of ETH in march 15th at a price of $2,977, I would have right now 3.35 ETH, whereas by DCA my position into ETH, it would look like this:
| Month | Investment in $ | ETH Price | Amount of ETH |
|---|---|---|---|
| January | 2,000 | 3,780 | 0.53 |
| February | 2,000 | 2,797 | 0.71 |
| March | 2,000 | 2,977 | 0.67 |
| April | 2,000 | 3,451 | 0.60 |
| May | 2,000 | 2,832 | 0.70 |
If I had DCA my way into ETH, I would have 3.21 ETH, a smaller amount by 0.14 ETH,
a smaller amount by only 300 USD, buy I would have avoided the stress and anxiety from putting all my spare money in one basket - or bag, as crypto investors like to call it. That's a great strategy to avoid issues if you are not built to stand the stress behind investing big time, all at once.
Lump sum investing
Or also known as going all-in, is when you take those 10k USD and buy the token at a price that you consider - after doing the proper research - could be the bottom. It takes time, energy, knowledge and shiton of luck and the token might go up or down, and you'll be happy in one month or think you are a fool in a trimester. Some people say that LSI only works in hindsight, which might be true. The key to being a Lump sum investor is to have diamond hands - which is to HODL through rain and haze - and to be able to withstand the stress and anxiety that comes with market volatility, because all your eggs are already in the basket, in the middle of the ocean, at the mercy of the market tide. The other con of this investing style, is that you have to have the 10k right now to do so, which is something that not many people have. To make money you have to have money.
Lump sum investing beats the shit out of Dollar cost averaging if you know what you are doing. Granted, nobody knows what the market will do, but you'd have to be a moron to Lump sum invest when ETH rallies from 2k to 4k in a month instead of waiting for the eventual dump. Most sound investors do not go for one or the other, but they rather diversify strategies and tokens, which sounds to me like real advice - yes, this is financial advice: diversify strategies and tokens.
Opinions about both
Now that you know the theory, let's jump into the reality of things.
When I was new to crypto I would DCA the shit out of my petty buy orders, now I just set limit orders at targets I know will hit - and if the market doesn't hit them, I don't buy. DCA can still be fine IF done in bear market lows or at least in bear markets in general, but I never do so in bull markets, that's when you DCA out. Bear in mind that DCA only works if you have a steady income and if you have spare cash every month to inject into any investment.
Whenever I Lump sum invest, I set targets, I never try to time the top. It's like blackjack, if you stay in the table for longer than what you established, you will end up losing money, it's better to walk away with gains and leave potential profit on the table, than overstaying and leaving with a loss.
If I am going to DCA my way into a token, I would try to find tokens that can be staked and provide yield while I do so, especially nowadays that even staking your grandma's soup into the grannytoken market gives a user yield in forehead kisses.
When I'm picking an investment strategy I take into account that I am not choosing one strategy over the other by thinking which one I think will make me more profit, instead I do so by deciding which probabilistic set of outcomes I like better. One Lump sums in because they just want in and they want in NOW, and they don't really care about the probability of market volatility getting your their bag (see, you already know crypto slang) into the red before the next pump (because they either figure the probability is low and/or that the dips won't be that deep, and they figure the next leg up could hit at any time). One DCA because they're feeling a little more tepid in their assessment, and will accept the risk of leaving gains on the table in pumps alongside the chance of getting extra gains buying future dips. It's a matter of picking your poison.
What about you?
Hopefully you made it this far down into the post, if you did, what's your opinion about both strategies?
Pic shamelessly stolen from unitunimelb, concepts and post both come from my granny brain.