When To HODL vs When To Average Down

When the value of your cryptocurrency tanks, which a lot of people have experienced these past two months, what should you do?

Do you cut your losses and try to jump onto something with more upside? Do you hide behind the sofa and cry until it’s all over?

Do you just HODL because we’ve been through this before? Telling yourself that the market moves in cycles and soon enough your coin will be up again?

Or…

Do you take a lesson from the Chinese, and realize every crisis is an opportunity.

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We know, “Chinese” can be a sensitive subject when it comes to cryptocurrencies, but hear us out.

This is the Traditional Chinese word for Crisis:

This is the Traditional Chinese for Opportunity:

As you can see, both words contain the character “Ji”, and if you consider the order of the characters, you will see how profound the expression is:

In every crisis lies the seed of opportunity.

Now, this has far greater philosophical uses than just saying “Buy the dip yo!”

It illustrates the point of this post quite poetically.

When learning to buy stocks, we were taught that if the stock you buy goes down in price for no real fundamental reason, then you buy more. This is also known as averaging down, and is what we’ll talk about in today’s post.

So the market has been a bloodbath for a couple of months now, and as we started to pick up the pieces and (im)patiently await the next bullrun, we realized that there were some good opportunities to average down some of our holdings.

The questions we were faced with though:

Which coins should we double down on, and which should we just leave alone? And should we abandon any completely?

Averaging Down

For something like Stellar (XLM), averaging down was a pretty easy decision.

We had bought about 3.6 ETH worth of Stellar right when it was pumping in January….right before it dipped to its current price. Now, we knew we were buying at an all-time-high when we went in, and we knew we’d probably have to sit through some losses, but because we were (and are) so bullish on XLM, we didn’t mind waiting. We just didn’t want to miss out entirely on the ride.

So about 8 days ago, when we had some more ETH to spare, we doubled down and bought another 3.6 worth of Stellar.

NOTE: You don’t need to “Double up” when averaging down. In fact the best practice is to just keep buying small amounts at regular intervals. We just chose to do another 3.6 ETH because it kept the calculations simple, and we figured the price was already cheap enough (ironically, it went down since).

We’re still down overall, but we’ve massively reduced our average buy-in price, and created even more future profits if the price reaches the heights we’re expecting.

Let’s take a look at these two XLM trades in more detail, so you can understand what we mean:

Initially, we bought 3.6 ETH worth of Stellar in early January and received 5,300 XLM. This means our initial price was 0.0006742 eth/xlm.

Last week, we bought another 3.6 ETH worth, and received 8050. So our price was 0.00044669.

In total, we had spent 7.2 ETH to receive 13,350 XLM for an average price of 0.000539.

So by doing this, we had basically reduced our buy-in price from 0.0006742 to 0.000539.

If/when XLM returns to those giddy heights of 0.0006742 again, instead of being break-even, we’ll actually be up by about 1.8 ETH, and those gains will scale exponentially.

Of course, there’s also the risk that Stellar never recovers to those heights, and all we’ve done is thrown more money away in an effort to save a losing trade.

Which is why this post is so important.

While the theory we just talked about above is a solid theory, you do need to consider the following things:

• Is this coin worth putting more money into? Will it go back up in the long run?
• If it IS worth putting more into, is now the right time to do it? Will you see better gains putting the money elsewhere?
• If it’s not worth putting more into, should you just sell it completely? Or is there still a chance it will go back up?

In the case of Stellar, we felt pretty confident it would go up again as soon as the market turned, and since no alts right now are really doing much, we didn’t see the point in putting the funds elsewhere.

For some of our other losing coins though, such as AirToken, we felt that the coin WOULD eventually recover, but that this would be a while away, and we didn’t want to commit further funds to the cause just yet.

No disrespect to AirToken by the way, we are continuing to hold it and feel good about its long term future, we just didn’t think there would be much ROI from averaging down at this point. It seems like a much longer play.

Right now we’ve never sold a losing coin (Apart from a mistake we made with BNB), and we also don’t really feel the need to sell any other projects right now either.

The entire altcoin market is down, so looking at particular coins in isolation is tricky. In December all the coins rose together, so presumably when the market turns again, we’ll see lot’s of alts gaining again, and that’s when we’ll look at selling some of them and rebalancing.

So let’s talk about how you go about analysing projects to see if they’re worth averaging down.

How To Decide Whether Or Not To Average Down

If you’re a technical analysis expert, you may have an entirely different strategy to what we’ve been using. For us, the only time we looked at the chart was to take a quick glance to see where the price was in terms of the bigger picture. Was it at an all time low? Did it appear to still be sliding?

We also looked at the entire market context as well.

If your coin goes down in value for no real reason other than the whole market is going down, then that could be a good sign to load up some more. It’s also important to compare how your coin’s value has changed in both BTC and USD.

So for our holdings, a few of them were ones we picked up at ICO. For these coins, we visited Reddit, Google, Twitter, and CoinMarketCal to see what news had been released recently, and to see what the various communities were saying about the projects.

With some, it was like harder work than others. Some teams are not that active on Reddit and prefer Telegram, Slack or Discord, whereas other teams are super active on Reddit but completely ignore Telegram. Your first piece of homework is to try and figure out where the community is.

If there isn’t a community to be found, and no real updates from the team, then you probably don’t want to be averaging down right now. You may even want to sell, unless you can see some updates on the horizon.

Google is also a good place to look. If you search for “[whatever coin] review”, you can usually find a fairly recent article at medium, reddit, or on a blog like ours.

Once you’ve (hopefully) found some news or recent updates from the project, you can start to ask yourself if this coin is promising in the short term.

It’s hard to know exactly how to define “promising” of course, but here are some things we looked for:

• Track record from the team of providing updates and communication in general.
• Milestones or important releases coming up in the next few weeks (such as mainnet, beta, wallet release, exchange listing)
• A reasonably active community. Again, this is harder to gauge but you should at least be able to tell if people are involved in the community or not.

With averaging down, you’re deploying funds, and you most likely don’t have an unlimited amount of them. This means you want to stick your money into a project with the best near term prospects.

If you have multiple options for averaging down, as well as other potential projects to get into for the first time, you’ll need to make a decision about the best way to place your funds.

As we mentioned above, when researching AirToken, we were happy with our findings on their progress and communication, so there was definitely no need to offload any tokens. However, we also felt that even when the market turns around, other projects are closer to reaching milestones and will likely have more immediate upside. Therefore, we decided to just sit on our AirToken position and not add anything more to it.

Afterall, the funds could have been better placed elsewhere.

So this is the decision you need to make. Do you think the project is going to increase? Great! Do you think it’s the best place to put your funds over the next middle to medium term period? Ok! Then go for it.

In many cases, it might be better just to keep on holding your current losers, and put new funds into something else, especially if that thing is also at the lower end of its price range. However, in some situations, you may be able to find a bargain price for a stellar (pun intended) project.

Are you guys HODL’ing through the rocky markets or have you found a project worth doubling down on?

Originally published at cryptosis.io on February 27, 2018.