The Meaning of Dollar-cost Averaging

They say a rising tide lifts all boats. It’s only true if your boat isn’t swamped by a wave. All investing involves risks, and investing in the crypto currencies may seem especially risky because crypto can exhibit great volatility.

Many investors are seduced by a deceptively simple idea: buy cheap. They think they should hoard spare cash, wait for a downswing, and then pounce on bargain investments at the “right moment.”

The “right moment” — what a wonderful idea. A few of those who follow its siren voice have become wealthy — but far more have lost out. Why? Because timing the market is harder than predicting the weather.

Even professionals and analysts find timing this crypto market extremely difficult — and these are people with advanced financial degrees, whose full-time job is to keep tabs on the market and still can’t do it right.

So it turns out that a far wiser strategy, for the majority of investors, may be to treat investing in the crypto market exactly like a savings account — or a piggy bank. You decide on an amount (let’s say $200) that you can afford to deposit every week or month. You add that much to your investment at the predetermined interval, regardless of the current price of the coins.

The result is “dollar-cost averaging.” If a coin rises and falls, you’ll sometimes be “buying high” and sometimes “buying low,” relative to a coin’s long-term performance. But it also means that you keep adding to your portfolio in a consistent manner. You don’t focus on crests and troughs. You avoid both the temptation to “play the market” and the risks involved in getting it wrong.

Getting the best out of the crypto market doesn’t just mean choosing good coins. You also need to ensure that, on average, your money does as well as those investments do. Hence “dollar-cost averaging” — AKA “choosing an amount to invest, investing that amount regularly, and not overreacting to the day-to-day coin price” — is a big step in a sensible direction.

“Dollar-cost averaging” is a technical term only economists could love, but it conceals a very simple, very good idea. There’s relatively short but strong evidence that good-quality coin could be a rising tide in the long run. On the other hand, big waves can blow up out of nowhere — and about the worst thing you can do in a heavy sea is try your hand at surfing the crests.

Past performance is not a guarantee of future returns.