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What Is Lump Sum In Crypto?

Sep 13, 2024

What Is Lump Sum Investing?

Lump sum investing in crypto means throwing all your money into the pot at once. It’s the opposite of investing smaller amounts over time. You might invest $10,000, $250,000, or even more, all in one go.

Maybe you just inherited some money, or received a big bonus.

Lump sum investing requires you to time the market perfectly. You should aim to buy when the price is low. Maybe the asset is still relatively unknown, or maybe it has recently dipped in price.

If you guess right, and the price goes up after you have made an investment, you could earn a lot of money. The more you invest initially, the more you could potentially gain.

Think of it like this: If you invest a large sum when the price is low, and the price rises, people who invest smaller amounts later will have to pay more for each coin. They’ll end up with less profit than you.

But what if you guess wrong? What if the crypto you buy drops in price? You could lose a lot of money. Someone who only invested a small amount could buy more when the price is lower. You might not have any money left to invest.

Image source: Versa

Even if you invest a big amount in Bitcoin and the price drops right after, it doesn’t mean you made a bad decision. Many strong assets increase in value over time, even if they go down in the short term. You might lose some money in the short term, but you could still end up winning more than other investors in the long run.

The key is to hold onto your investment and let it grow. Research suggests that in the long run, lump sum investments can be more profitable than DCA.

Pros & Cons

Lump sum investing, like any other investment strategy, has its pros and cons. Let’s take a closer look at both sides.

Pros

Good for long-term investing: Lump sum investing shines for people who plan to hold onto their crypto for years, even decades. The earlier you enter the market, the better, as markets tend to grow over time. Even if you experience short-term dips, you’ll likely come out ahead in the long run. Research suggests that lump sum investments have outperformed other methods like DCA in the past.

Image source: Morningstar

Simplicity: This approach is relatively stress-free. You need to do your research to find good investments and choose the right time to buy, but once you’ve made your purchase, you can just sit back and watch your portfolio.

Cheapness: Lump sum investing can save you money on trading fees. You only need to pay the fee for your initial purchase, not for multiple smaller transactions over time.

Cons

Requires much money: You need a large sum of money to make a lump sum investment. If you don’t have enough, you’ll need to save up, which takes time and goes against the idea of entering the market as early as possible.

Not for beginners: Lump sum investing relies on picking the right moment and the right crypto to invest. If you choose a crypto that loses value, you could lose a lot of money. Alternatively, you could buy when the market is already high. If you need to sell your investment quickly, it could be during a downturn, leading to significant losses.

Examples

Let’s imagine John heard about crypto in November 2017 when it was all over the news and the market was booming. He wanted to invest his $20,000 inheritance.

He decided to buy Bitcoin (BTC) and Ethereum (ETH) in December 2017. Bitcoin was close to $11,000, and Ethereum was around $500. John bought 1 BTC and 18 ETH.

He went against one of the basic investment rules and bought when the market was already going up. In 2018, both cryptocurrencies lost value. John’s $20,000 investment fell below $10,000.

However, in August 2024, 1 BTC and 18 ETH combined were worth around $100,000. This means John’s investment grew five times in seven years.

If John had waited for a bear market and bought BTC and ETH in December 2018, he could have bought 4 BTC at $3,500 and 60 ETH at $100. In August 2024, that investment could have been worth $370,000. That’s a huge gain in just six years.

This example shows the potential of lump sum investing, but also highlights the risks. You need to be comfortable with the possibility of short-term losses and willing to hold your investment for the long haul to reap the potential rewards.

Lump Sum vs Dollar Cost Averaging (DCA)

Dollar-cost averaging (DCA) is a different approach. You invest the same amount of money in the same asset (or assets) at regular intervals. It could be every first day of the month, every Monday, or every two months – whatever works for you. The key is to invest the set amount at the set time, regardless of the current market trends. This helps you “average out” the price of the asset, buying low sometimes and high sometimes. Over time, this can help you benefit from market fluctuations.

DCA is perfect for investors who don’t have a large sum to invest at once. It also doesn’t require you to try and predict market trends. You just invest according to your plan. While DCA is simple and stress-free, research suggests that lump sum investments are generally more profitable in the long run.

Lump Sum vs Systematic Investment Plan (SIP)

A Systematic Investment Plan (SIP) is a type of DCA strategy where you invest in a mutual fund. These funds hold a collection of different assets, including cryptocurrencies. Like DCA, SIPs involve regular investments, but they’re focused on mutual funds. Again, lump sum investments usually outperform SIPs in the long run.

Conclusion

A lump sum investment requires investing much money at once which can be stressful. It’s important to pick up a worthy crypto asset to invest in, or a group of cryptocurrencies for the sake of portfolio diversification which is a risk management strategy. A lump sum investment is regarded as a long-term strategy as in short-term, the investment can have declines in value while growing in the long-term. This strategy is often regarded as more profitable than DCA and SIP.

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