The Truth About Leveraged Dollar-Cost Averaging: Why Risk and Return Are Not Proportional

There is an enticing promise circulating in crypto investing: the more leverage you increase, the greater the returns you can unlock. Going from 2x to 3x sounds perfectly reasonable—almost too reasonable. But five years of real backtesting data tell a different story.

The Harsh Reality Behind Risk Indicators

Let’s first look at a set of drawdown data. Using an initial principal of $18,250 for a five-year dollar-cost averaging test, the maximum drawdowns for three strategies are:

Spot DCA: 49.9% drawdown — the account drops to just over 50% of its value at its worst

2x leverage DCA: 85.9% drawdown — at its lowest, only 14% remains; a 614% increase is needed to break even

3x leverage DCA: 95.9% drawdown — an eye-watering figure, meaning only 4% remains at the bottom; a 2400% increase is required to recover to the initial level

This is not just a numbers game. During the deepest part of the 2022 bear market, investors holding 3x leverage DCA were essentially approaching “mathematical bankruptcy”—subsequent gains were mainly driven not by the recovery of the original position, but by new capital投入 at the bottom of the bear market.

There is also a lesser-known metric called the “Ulcer Index,” which measures the psychological torment of long-term losses in an account. Spot DCA has an index of 0.15, 2x leverage is 0.37, and 3x leverage soars to 0.51. This means that investors using 3x leverage are mostly creating negative feedback loops—every time they open the software, it’s a psychological ordeal.

The Heartbreaking Truth About Returns

Now, looking at the final results: after five years, the spot account grew to $42,717, the 2x leverage account reached $66,474, and the 3x leverage account finally hit $68,833.

While 3x leverage did outperform 2x, it only gained $2,300 more. In contrast, going from 1x to 2x leverage earned an additional $23,700—an entire tenfold difference. This is the reality of diminishing marginal utility: each additional doubling of leverage significantly reduces the rate of return increase, while risk rises non-linearly.

Even more sobering is the composition of this “victory.” Examining the net value curves reveals: the spot DCA curve is relatively stable, with ups and downs but overall upward; the 2x leverage explodes in a bull market but suffers severe drawdowns in bear markets; the 3x leverage curve, over several years, remains near the bottom, only barely surpassing the 2x leverage during the strong rebound in 2025-2026.

In other words, the “victory” of 3x leverage entirely depends on the tail-end market rally. Without this rebound, or if you are forced to cut losses due to pressure, the outcome would be completely different.

Volatility Drag: The Invisible Profit Erosion Mechanism

Why does 3x leverage perform so poorly? The answer lies in the collision between daily rebalancing mechanisms and high volatility.

Maintaining a fixed leverage ratio requires daily position adjustments: buying more when BTC rises, reducing when it falls. This is reasonable in stable markets but becomes a killer in high-volatility environments.

Suppose BTC oscillates with a 5% gain one day, a 5% loss the next, and another 5% gain the day after. A spot holder just stays put. But what about 3x leverage? Each fluctuation erodes principal—buying high during rallies and selling low during dips, repeatedly shrinking the account. This is the classic volatility drag effect.

The key point is that volatility drag is proportional to the square of the leverage ratio. For an asset like BTC with an annualized volatility exceeding 60%, 3x leverage faces a volatility penalty of 9 times. Mathematically, long-term returns can be approximated as: Annualized Return = Expected Return - 0.5 × Volatility² × Leverage². Over years of oscillation, a 3x leverage account is like running on a treadmill, desperately trying to move forward but staying in place.

Risk-Adjusted Returns Reveal the True Picture

Considering risk factors, the Sortino ratio for spot DCA is 0.47—this number represents the maximum return per unit of risk. It outperforms all leverage strategies, doing so with the lowest psychological cost and easiest execution.

2x leverage might be an option, but only for a very small minority—those capable of enduring an 85% drawdown, with sufficient cash flow to meet margin calls, and strong enough mental resilience to survive the darkest hours. Most will be forced out midway.

As for 3x leverage, the five-year backtest results are clear: extremely low long-term cost-effectiveness. The extra 3.5% return cannot compensate for the extreme risks, psychological torment, and near-zero probability of success. More critically, it ties your fate to the dangerous assumption that the market must end strongly—an extremely risky premise in investing.

The True Wealth Code

BTC itself is a high-risk asset, with annualized volatility over 60% and daily swings of 10% commonplace. If you truly believe in its future, the smartest approach is to reduce leverage, extend your time horizon, and let compound interest and time perform miracles that leverage alone cannot deliver.

True wealth is not measured by how much you earn in a crazy bull run, but by how much remains after a full cycle, and whether you maintained rationality, health, and love for life during the process. Ultimately, the investor who reaches the end is never driven by higher leverage, but by clearer awareness and steadfast persistence.