Traders and investors leveraging cryptocurrency and stocks as investment options often are at crossroads on what price levels to jump in on a cryptocurrency or stocks.
Some other categories of investors are constantly faced with the pressure that comes from a decline in the price value of digital assets purchased at a go.
The cryptocurrency market is volatile, creating a hurdle for investors looking to buy cryptocurrencies and stock assets at base bottom prices. Massive trends and price reversals could occur swiftly, resulting in missed trades and buy opportunities for investors without a buying strategy.
Although cryptocurrencies may offer life-changing opportunities to their holders, in the case of a downtrend, many traders may keep busy trying to spot the exact bottoms in the prices of a crypto asset.
The Averaging down investment is a strategy that is fast becoming a relatively effective investment plan for investors looking to leverage investment opportunities in the cryptocurrency and stock market.
In this article, our focus will be on the application of the averaging down strategy, the advantages, and the disadvantages. What is an Averaging down strategy?
What Is Averaging Down?
Often when a stock or cryptocurrency's price is downtrend due to market conditions, investors may look to take advantage of an "Averaging Down investment strategy."
Averaging down, or reducing the average price at which you bought a stock or cryptocurrency, refers to purchasing more shares and holdings of a stock or cryptocurrency for less money than you previously spent.
Averaging down is an investment strategy investors use to averagely purchase stocks or cryptocurrencies at low price intervals to significantly reduce the average cost incurred in purchasing a cryptocurrency or stock.
For instance, let's say you spend $10,000 to purchase 100 shares or units of a cryptocurrency at $100 each. The asset then declines to $80 per share. Then, you spend an additional $8,000 to purchase 100 more shares of a stock or cryptocurrency at $80 each.
You invested $18,000 in total and now possess 200 shares. You currently own shares with an average cost per share of $90 compared to the initial price of 100$ which you bought.
This purchasing strategy can be leveraged for as long as the price of a cryptocurrency or stock hits new lows.
In the event of a stock asset or cryptocurrency price reversal, an investor applying the averaging down strategy may have successfully purchased a stock or cryptocurrency at significantly low prices or base bottoms.
This may present an opportunity for an investor to reap massive gains and returns on investment (ROI) when a significant price reversal or uptrend is confirmed.
Understanding the Average Down Strategy
The stock and cryptocurrency markets are governed by the idea of purchasing an asset at a low price and selling it at higher prices.
A volatile market, however, prevents an investor from following through with this trader mindset due to fluctuations in price movement.
In this scenario, an investor may have bought a cryptocurrency asset he considers to be at a fair price. Still, the price value goes way lower due to price fluctuations and market sentiments.
It can be very frustrating investing some amounts of money in a stock or cryptocurrency all at once and then seeing the price value drops lower than your previous entry point.
In most cases, some investors may wait patiently for the price to recover to their initial price purchase to sell off or leave it to run, as would long-term investors.
Some investors may employ a smarter approach to investing by adopting an "Averaging Down strategy."
Investors apply this strategy by constantly purchasing units and shares of a stock or cryptocurrency experiencing a decline and downward momentum.
This strategy may be profitable to investors in the long run due to market recovery and positioning investors with increased shareholdings of a stock or cryptocurrency purchased at low price intervals.
Example of Averaging Down
An investor with strong convictions about the potential value of a cryptocurrency or stock in the long term may adopt an averaging down strategy as the price goes lower.
Assume, for instance, that a long-term investor has Bitcoin (BTC) in their portfolio and thinks highly of the asset's potential value.
Irrespective of a turnout of market events leading to a significant decline in the price of BTC assets, this long-term investor believes in BTC price potential and sees every low as an opportunity to stack up on BTC assets and increase holdings.
On the contrary, long-term investors invested in a particular cryptocurrency or stock are not deterred by the outlook or pessimistic views a variety of short-term traders or investors may have about a particular cryptocurrency or stock assets they are heavily into.
In the event of a downtrend and sharp decline in the price of the crypto asset, Investors in it, as a long-term investment strategy, would use the averaging down strategy to get the best price for the assets of the value in question.
Why Average Down
Investors and traders looking to profit from stock and cryptocurrency investments, in the long run, may look to an averaging down strategy in building portfolios and holdings for the reasons below;
Purchasing cryptocurrencies using the averaging down strategy may present opportunities for value in the long run. As the prices of digital assets decline, investors can purchase different low prices of an overvalued cryptocurrency that looks promising.
This strategy may provide access to an investor to build robust portfolios and increase holdings and shares of a favorite cryptocurrency at different low prices.
Every trader and investor has an investment goal regarding investing in a cryptocurrency. For some traders, investing in a cryptocurrency long-term is an ideal fit as they look to reap massive gains in the future by holding carefully selected cryptocurrencies.
Value investing to the Averaging down strategy involves analyzing and selecting cryptocurrencies that may appear to be trading for less than their intrinsic value due to poor market conditions.
Value investors who utilize the averaging down strategy plan to hold cryptocurrencies that are underestimated in the general crypto market due to fear and uncertainties of a bearish market or significant downtrends.
Value investors strongly believe that the decline in prices of cryptocurrencies is not a true reflection of a value-packed cryptocurrency in the long term. This mentality or investor mindset may enable investors to profit long-term from selected cryptocurrency assets.
Dollar-cost averaging is consistently investing a certain amount of money in a cryptocurrency, regardless of varying price levels.
Investors can lower their average cost per share and lessen the effect of volatility on their portfolios by employing dollar-cost averaging. This helps investors adopt an averaging down strategy in purchases of cryptocurrency assets.
Investors and traders may employ an averaging down strategy to minimize asset losses by averaging down on price and purchases in case of significant or further drops in the prices of the crypto assets purchased due to market sentiments and overall market conditions.
To break even, Investors experiencing losses due to a downtrend in prices of crypto assets may positively reduce the impact by purchasing more cryptocurrency assets. Averaging down on low prices is done to make up for high purchases when there is a price reversal.
Investors carrying out short-term or long-term investments in cryptocurrencies without proper strategies to mitigate risks have a high chance the trader may suffer huge losses and sell short just before a price reversal.
Pros and Cons of Averaging Down
An averaging down strategy may place investors at an edge or advantage and disadvantage depending on its application.
Pros of Averaging Down
A major advantage of adopting an averaging down strategy is that it allows an investor to significantly reduce the average cost of owning multiple crypto assets without a profitable return.
Averaging down may also guarantee a breakeven price point for losses incurred at initial purchases of crypto assets.
The averaging down strategy may also result in massive gains resulting from increased shareholdings of cryptocurrency assets compared to the gains and profits of one-off purchases at a price point.
Cons of Averaging Down
An averaging down strategy is only as useful and profitable when there is a recovery or complete price reversal. However, losses are accelerated if the price of a crypto asset continues to fall with no hope of a reversal in sight.
Investors who average down on price rather than sell off crypto assets may regret their choice if the cryptocurrency price value continues to decline. This calls for Investors to accurately evaluate the risk profile of the crypto asset before averaging down. But this is easier said than done, and it gets increasingly harder to execute during bear markets.
Averaging down strategy needs proper research and knowledge; when not done in the right way can incur so many losses. To avoid the stress of averaging down or dollar cost average, Margex, a bitcoin-based derivative, allows traders to open a trading position with a 100x leverage size, and you can stake tradable assets for a high APY return of up to 13%. No lockup and withdrawal of staking rewards are made daily directly into your staking balance.
Is Averaging Down an Effective Strategy?
The answer to this question is relative and may vary from investor to investor. The effectiveness of the averaging down strategy may depend on the choices of its application by an investor. The averaging down is not a strategy used carelessly by everyday investors making cryptocurrency investments.
An investor who is knowledgeable and takes a contrarian approach by buying more of an asset facing a decline may sometimes get value on investments if a major price shift or reversal occurs.
On the other, if an investor is not well researched on the crypto market and the possible reasons why a high sell activity has occurred, buying cryptocurrency assets while others are selling might pose a big risk and result in significant losses.
Also, investors invested in a company as opposed to crypto assets may be able to determine more accurately, based on historical performance and the present condition of the company, whether a decline in the assets’ price is only for a short time or an impending price collapse.
Employing an averaging down strategy may be put to good use if an investor sincerely believes in a company and wants to increase its value.
Moreover, if you are not knowledgeable in this strategy, you can trade and stake your tokens or crypto assets on Margex with an APY of 13%, as there is no lockup of assets. Staking rewards can be withdrawn daily into your staking balance, and this is done with the Margex automated machine.
Frequently Asked Questions On The Averaging Down Strategy
Averaging down strategy despite being used by big crypto players and institutions, there are many unanswered questions as regards this strategy. Here are the commonly asked questions.
Is Averaging Down A Good Strategy?
An averaging down strategy may be a good strategy for investors if properly utilized and applied to well-researched cryptocurrency assets instead of a general application.
Narrowing down this strategy to carefully selected cryptocurrency may present opportunities for Investors to build holdings and portfolios.
Do You Lose Money When Averaging Down?
Traders and investors applying the averaging down strategy may lose significant amounts of money applying this strategy to cryptocurrency.
Significant losses may occur in a scenario whereby a crypto asset experience further declines in price and value without showing positive signs of recovery and price reversals.
Traders and investors leveraging cryptocurrency investment options may need thorough research and studies before investing and adopting the averaging down strategy.
What Is Averaging Down And When To Use It?
Averaging Down is an investment strategy adopted by traders and investors in buying additional cryptocurrency assets when there is a sharp decline in the price levels of cryptocurrencies.
Investors may utilize this investment strategy when crypto assets they purchase and hold suffer price crashes due to bad market conditions.
Traders and investors may also adopt averaging down strategy to make massive gains when there is a price recovery and become profitable in the long run.
However, investors may need to conduct external background checks, such as the fundamentals and technical analysis of the cryptocurrency asset, before applying the averaging down strategy.
How Do You Average Down?
Investors looking to adopt this strategy may purchase additional quantities of a cryptocurrency when it experiences a price decline or downtrend. Sometimes an investor may also need to evaluate cryptocurrency fundamentals before embarking on an averaging down strategy.
Investors may also leverage decentralized exchanges and trading platforms such as the Margex trading platform in trading and staking your crypto assets without worries about how to apply different strategies.
Why Should You Not Average Down?
Whether to use an averaging down strategy differs from investor to investor preference. If not properly applied, the averaging down strategy may present opportunities for profitability and incur more losses.
Investors may need to be updated on the fundamentals of preferred stock and cryptocurrencies before concluding whether an averaging down strategy is the best option or not.