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What is Averaging Down and When Should You do It?
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Averaging down is the process of increasing your holdings when a cryptocurrency has decreased in price.
By doing this, you are decreasing your average buy price.
Therefore, when the price increases, it won’t have to increase in price as far for you to be back in profit.
If you are averaging down, you must be aware that you will lose more if the price decreases further.
How do you do it?
To begin, you must have bought some cryptocurrency. Let’s say you bought 1 BTC at USD7000. Your average buying price is USD7000.
If while you are holding your Bitcoin the price decreases, you can begin to average down.
Simply put, all you have to do is buy more of the crypto at a lower price.
However, when averaging down it is always worthwhile considering doing it in stages, similar to dollar cost averaging.
If the price of BTC has now decreased to USD6500, the BTC you are holding is worth less since your buying price is still USD7000.
If you buy 1 more BTC at this price, your average buy in price will decrease to USD6750.
This is desirable for investors because the price does not have to rise back to your first buy in price for you to be in profit.
If the BTC price now rises to USD6900, you will have made a profit.
Why shouldn’t you average down?
Averaging down increases the amount you have invested in a crypto. When you buy at a lower price, your average buying price will decrease.
However, this does not guarantee that the price will go back up and put you in profit. If the price decreases further, you will be at a larger loss.
You have to consider that you have the potential to lose more. To reduce risk while averaging down, consider following a program similar to dollar cost averaging, so you will reduce the risk that comes from price fluctuation.
Averaging down is used to decrease your average buying price, so if the price increases you will be in profit sooner.
Investors using this strategy must be aware that they are also in a riskier position, and if the price decreases more, they will be at a larger loss.