Good day Midas and DIVI Communities!
This article is the second installation in our series on the DCA (Dollar Cost Average) Investment strategy. In this series, we are looking at a hypothetical one-year backtest of our DCA strategy on various masternode coins. As stated in our first article, this series is intended for educational purposes on the DCA strategy and is not financial advice. Always do your own research before making an investment and do not invest more than you are willing/able to lose!
What is Dollar Cost Averaging?
Dollar Cost Averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. It is also known as the constant dollar plan (Investopedia.com).
This strategy can be thought of as a tool that investors can use to build savings and wealth over a long period. Rather than based on speculation and rapid market movements, the DCA strategy minimizes risk and is simple enough for even the most inexperienced investors to use.
Typically DCA strategies are used to build a 401k or retirement account, but we will be applying this long-used strategy to Masternode coins. Today it will be DIVI.
Our Application of the Strategy
For our backtest, we will be taking a snapshot of the price of DIVI on the 1st day of every month, starting in May 2019 and ending in May 2020 – for a total of 13 months. In this hypothetical situation, our investor will purchase $100 of coins at the spot price on the first of the month. We will look at two alternatives: one with reward reinvestment, and one with selling rewards monthly.
Total Capital Invested: $1300
May 2020 balance (USD, Reinvesting) : $2629.78
- May 2020 balance (USD, selling rewards): $2059.79
- Dividend: $451.94
*Note: the “DIVIDEND” portion only applies to the “selling rewards” plan. The total portfolio value of this plan can be determined by adding the balance and dividend.
Below is a graph of portfolio value per month vs investment amount:
The blue bar represents the total invested capital, and the red represents the DIVI portfolio value. As you can see, for the first three months the portfolio was in a slight loss. However with the DCA strategy, these dips in price present good buying opportunities, and compound the positive impact of upward price movements.
At the end of the one year investment plan, the DCA strategy with reward reinvestment yielded a 202.2% ROI on a $1300 investment.
The alternate strategy of DCA with reward sale yields the following result:
The red and blue bars represent the same data as before, but the yellow is the cumulative value of sold rewards.
The total return of the DIVI holding and sold dividend is $2511.73, representing a 193.2% ROI on the $1300 investment. While this is slightly lower than the reinvested amount, the sold rewards reduce exposure to price corrections – and thus reducing the overall volatility of the plan.
While both strategies are extremely profitable, the reinvestment strategy underscores the powerful compounding effect that can be leveraged by Masternode coins. Midas’ Instant Share innovation allows users to continuously reap the benefits of reinvestment – eliminating the delay of waiting for the collateral to start a new node.
We will continue our DCA analysis on various coins and coin portfolios available on the Midas platform in the coming days/weeks. Stay tuned for more updates!