Dollar-cost averaging

Dollar-cost averaging means investing the same amount at regular intervals, whatever the price is doing. It is a simple way to remove the question of when to buy. It is a method, not a guarantee.

How it works

You pick an amount and a schedule, for example $50 on the first day of each month. Then you keep to it.

When the price is high, your $50 buys less. When the price is low, it buys more. Over time, your average cost per coin ends up below the average of the prices you paid.

An example

The prices below are made up to show the arithmetic.

You spent $200 and hold 0.002625 BTC. Your average cost is about $76,190 per bitcoin. The average of the four prices was $82,500. The low-price month bought the most, which pulled your average down.

What it does well

• Removes timing. Nobody reliably picks the bottom. A schedule means you do not have to try.
• Reduces regret. You never put everything in on the worst possible day.
• Fits a salary. Most people invest from income as it arrives, not from a lump sum.
• Builds a habit. A rule you set in advance is easier to follow than a decision made while prices swing.

What it cannot do

Dollar-cost averaging does not protect you from losses. If the price keeps falling and does not recover, you lose money on every purchase.

It is also not the best choice in every case. Vanguard studied stock and bond markets from 1976 to 2022. For people who already had a lump sum, investing it all at once beat spreading it out about two-thirds of the time. The reason is that those markets rose more often than they fell, so waiting usually cost returns.

That research did not cover crypto, which is far more volatile. The same paper noted that spreading purchases may suit people who would find a sudden loss hard to bear.

Doing it sensibly

• Watch fees. A fixed fee on each small purchase adds up. Fewer, larger purchases may cost less. See Lesson 15.
• Set the total first. Decide how much you are willing to put into crypto overall. Lesson 20 covers this.
• Automate with care. Recurring buys are convenient. Review them every few months.
• Keep records. Every purchase has its own date and price for tax.