What is dollar-cost averaging?

Dollar-cost averaging, often shortened to DCA, means investing a fixed amount of money at regular intervals, whatever the price happens to be. The buyer receives more coins when prices are low and fewer when they are high. It is a way of spreading out the timing of purchases, not a way of avoiding losses.

How does dollar-cost averaging work?

Take a made-up example. Someone puts $100 into a coin on the first day of each month for four months. The price is $50, then $25, then $40, then $50.

• Month one: $100 buys 2 coins.
• Month two: $100 buys 4 coins.
• Month three: $100 buys 2.5 coins.
• Month four: $100 buys 2 coins.

The total is 10.5 coins for $400, an average cost of about $38 a coin. The average of the four prices was higher, at $41.25, because the fixed sum bought more coins in the cheap month.

The approach is familiar from retirement plans, where a set amount goes into funds from every paycheck. Many crypto exchanges and apps offer a recurring-buy feature that does the same thing automatically.

What does it do?

DCA deals with one problem, which is timing. Crypto prices are highly volatile, and nobody can reliably pick the low point. Spreading purchases over time means the buyer never commits everything at a single price, so the risk of buying it all at a peak is reduced.

It also takes decisions out of the process. A fixed schedule leaves less room for buying in a rush of excitement.

What does it not protect against?

• A falling asset. If a coin keeps dropping and does not recover, a DCA buyer loses money, just more gradually. Averaging into a coin that goes to zero still ends at zero.
• Missing out in a rising market. When prices climb steadily, money invested all at once at the start buys at lower prices than money fed in later. DCA does not promise a better result than a single purchase.
• Fees. Many small purchases can cost more in fees than one large one, especially where a platform charges a minimum amount per trade.
• Record keeping. Each purchase has its own price and date. In countries that tax gains on crypto, every one of those lots has to be tracked for the eventual sale.

What do the critics say?

DCA is a method for when to buy. It says nothing about what to buy, or whether the asset has any lasting worth. Critics note that it is sometimes promoted as if it made a risky asset safe, which it does not. The total amount at risk is the same as if it had been invested in one go. Only the entry price changes. It also offers no defense against a project that turns out to be a rug pull.