Warren Buffett advises to the average cost effect – also for Bitcoin this strategy is worthwhile
- POSTED ON
- 2. November 2020
The average cost effect is a worthwhile investment strategy due to the strong price fluctuations of Bitcoin.
Investment guru Warren Buffett advises inexperienced investors to take advantage of the so-called average cost effect when investing in the stock market. As the data of the last ten years show, this strategy is also highly recommended for Bitcoin (BTC).
The average cost effect describes an investment strategy in which investors divide their investment capital evenly over a longer period of time and invest repeatedly at certain intervals. The idea behind this is that investors automatically buy more shares when prices are low, while they buy less when prices are high.
Buffett is a proven advocate of this method, considering it particularly useful for investments in stock indices. The „Oracle of Omaha“ praises above all the important American stock index S&P 500 as the optimal vehicle for the average cost effect.
However, a look at Bitcoin shows that even the market-leading crypto currency has more than profitably implemented this strategy in recent years, because over the last ten years Bitcoin has made record profits of 100% per year. In addition, 98% of Bitcoin addresses are currently profitable.
Bitcoin and the average cost effect
As an example: If an investor had invested a total of $35,700 in increments of $100 per investment in Bitcoin since January 2014 with the average cost effect, the current profit would be 1,648% or just under $589,000.
Calculation example for the average cost effect for Bitcoin.
And still another further example: When the rate of the crypto currency was 11,744 US Dollar on 6 August, the crypto market researchers of CoinMetrics calculated that if investors had used the average cost effect since the record high of 20,000 US Dollar, a profit of 61.8% would be booked. To that end, they explain:
„Although #Bitcoin remains just under 30% below its previous record high, the average cost effect would yield a return of 61.8% or 20.1% per year since December 2017.
Since August, the share price has again risen from $11,744 to $13,840, a jump of 17.9%. So the yield from the average cost effect since the record high of $20,000 would be even higher in the meantime.
There are several reasons why long-term regular investments in Bitcoin work despite the volatility of the crypto currency. One of these reasons is that Bitcoin is establishing itself more and more as a store of value in the style of gold.
In the current year the institutional interest in the crypto market leader has increased significantly. BTC is interesting for institutions both as a means of protection and as an investment product that offers the chance for exponential growth.
The average cost effect works for Bitcoin, since the crypto currency fluctuates strongly downwards again and again. As soon as thereupon again an upswing follows, again high profits can be brought in, which are underpinned by a constantly improving infrastructure and good fundamental data on a long-term basis.
Thus Bitcoin had slipped in March 2020 in the meantime up to 3,600 US dollars and stands on today’s 1st November again at 13,800 US dollars, which corresponds almost to a quadrupling.
Price chart of Bitcoin.
Meanwhile, Glassnode’s crypto analysts have found that 98% of all Bitcoin addresses show a profit. They calculated this statistic by looking at when and at what price BTC first flowed to each address and comparing the current price level. This is what they write:
„98 % of all #Bitcoin addresses are currently profitable. We have not seen such a value again since December 2017. This is characteristic for an upward trend“.
For an investment product that offers the opportunity for exponential growth, high-risk strategies can be difficult to pursue. The average cost effect is therefore perhaps even the best investment strategy for Bitcoin.