Definition
Dollar-cost averaging is investing a fixed amount of money at regular intervals, such as every week or month, regardless of the price. Because the amount stays the same, it buys more units when the price is low and fewer when it is high.
How it works
Instead of investing a lump sum on one day, a dollar-cost averaging plan splits the money into equal purchases on a schedule. Each purchase buys amount ÷ price units. The resulting average cost per unit = total amount spent ÷ total units bought. Because more units are bought at lower prices, this average is lower than the simple average of the purchase prices whenever the prices differ.
The main benefit is lower timing risk. The buyer does not need to pick the right day, and a single purchase at a temporary peak carries less weight. Many people use the method simply because it matches a regular income, and some exchanges and brokers offer automatic recurring purchases.
Dollar-cost averaging does not guarantee a profit or protect against losses. If the price falls and never recovers, every purchase loses value. When prices rise steadily, investing the full amount at the start would have bought more units. Fees also matter: a fixed fee per purchase takes a larger share of small, frequent buys, so both the number of purchases and their size affect the result.
Example (hypothetical numbers)
Suppose you invest $100 in Token X every month for 4 months, and the price is $10, $8, $5 and $10 on the purchase days.
Units bought: $100 ÷ $10 = 10, $100 ÷ $8 = 12.5, $100 ÷ $5 = 20 and $100 ÷ $10 = 10, so 52.5 units in total.
Average cost = $400 ÷ 52.5 = about $7.62 per unit, while the simple average of the 4 prices is ($10 + $8 + $5 + $10) ÷ 4 = $8.25.
At the final price of $10 the 52.5 units are worth $525, but if the price had stayed at $5 they would be worth only $262.50.
The schedule lowered the average cost, but whether it ends in a profit still depends on where the price goes.
Common mistakes
- Believing a regular purchase schedule guarantees a profit if it is continued long enough.
- Ignoring per-purchase fees; a $1 fee on each $100 purchase costs 1% before the price moves at all.
- Calculating the average cost as the simple average of prices instead of total spent ÷ total units.
Related calculators
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.