Creating an Average Position in a Bear Market

Someone who has zero exposure to cryptocurrency, but knows they want cryptocurrency, might consider building an average position slowly over time, aiming to have a position built by the end of the bear market.

One might do this, as opposed to waiting for the bottom to be in, because for most people timing the bottom of a complex 24/7 global market full of wild mood swings is unrealistic.

The mindset is something like: I’ve always thought cryptocurrency was cool, I was annoyed I missed the last run up, I really don’t want to mistime this, but I do want to be in crypto.

If that is your mindset, then averaging might be worth entertaining now that we are back to 2017 prices in many cryptos.

Using ETH as an example, to average in, one might do one of the following:

  1. Put a buy in ever $50 increment starting at $200 increasing the size of one’s buys as ETH goes down.
  2. Put buys in just above support levels increasing the size of one’s buys as it goes down (see examples above, these aren’t supports to use, it is an illustration of how to roughly find supports; HINT: from a simple frame it is just where the price consolidated in the past).
  3. Do either of the above, but buying the same dollar amount each time.
  4. Do either of the first two, but buy the same amount of Ether each time.

NOTE: We could be talking about any coin, Bitcoin, Ethereum, Ripple, etc. Of those Bitcoin is the safest, but each coin has its own character and each is its own investment (despite them all being intent on tracking Bitcoin 9 times out of 10).

In all cases, the concept is the same: One is lowering their average price as the price drops (as opposed to trying to catch the bottom or catch the next uptrend; both of those take considerable skill and a little luck).

The logic here is that we don’t know if the price will drop further, we only know what it is doing now, so we just go ahead and make our first buy here (being very careful not to overexpose ourselves or play with money we can’t afford to lose and or sit on for years) while having a plan for what comes next.

Consider the following examples:

  • I have 1 ETH at $200, 1 at $150, 1 at $100, and 1 at $50. My average price is $125 and Ether is $50. That isn’t great, but its better than an average of $200. I can always buy more if the price stays low or rises and bring my average price down. If the price goes up, great, again $125 was better than $200. This is better than going all in now if the price drops more.
  • I have 1 ETH at $200, 2 at $150, 4 at $100, and 16 at $50. Here my average price is a little under $75. Sure, I could have waited until the price was exactly $50 to buy all 23 ETH… but like, no one has a crystal ball. If we were going to wait until the price was $50, because we knew that was the bottom, we would not be averaging, we would be timing the bottom (that is a different article).
  • I spend $100 each time ETH drops $50. Each time it drops I get increasingly more Ether. .5 at $200, .75 at $150, 1 at $100, 2 at $50. I now have 4.25 ETH for $400, my average price is a little less than $100 an ETH. Again, it isn’t $50, but it is a decent and controllable strategy.

So you might then ask, “what if it goes to zero, or $25, or something lower, etc?”

Good questions,

  1. If it goes to zero you should buy 100,000,000 ETH… because then you will own all ETH and pay zero per coin you buy at zero. Your average cost would then be next to zero per ETH.
  2. If it goes to $25…. make sure you plan for that. Have money to buy, for example, 100 at $25, 200 at $10, 500 at $5, etc.

The reality is if crypto dies and goes to near zero averaging in will have been a pretty bad strategy, because the whole asset class will have in retrospect been toxic, so any strategy that involved you ending up with crypto was likely a bad one. This means your whole idea of buying ETH was actually pretty bad in the first place.

A good strategy can’t save you from a toxic asset. Of course, the whole premise here is that we are starting off with a bet that Ethereum (and crypto generally) is a good asset to own, and it is not the asset, but instead the current market for that asset that is a problem.

All that covered,  the gist here is taking a conservative amount of expendable income and committing it to catching a giant falling knife slowly and with tact…. because of an underlying desire to own the asset.

The worse you time the market on your first buy, the worse off you will be. That is reality. If ETH goes to zero, then all buys higher than zero will be bad bets. That is also a reality.

However, if it is that ETH randomly does some common crypto nonsense like Doge just did and jumps up 200% before you can collect your thoughts, then at least you have some buys in and don’t feel the need to FOMO in at the new high. You can just kick back at that point and enjoy.

This strategy makes it so the price going down offers some benefit, AND you have ETH AND you don’t have to worry about FOMOing when the market turns around (the psychological pressure to FOMO can be really intense if you are a fan of the underlying asset).

Simply put, averaging for all its dangers of mistiming your buys, is a solid way to approach a volatile asset you know 100% that you want to be long in but don’t know how to approach.

Usually we don’t want to try to catch falling knives in investing… but when it comes to something you know you want, something you know you would buy higher later even if it just kept going up, it is hard to just say “no thanks”… and thus you need a plan.

So, instead of going all in, or waiting until the bear market is over, you can choose to average in.

Some will be more conservative and average in once they think the bottom is in, but those who don’t feel like playing expert crypto fortune teller person can just do the stupid simple average tactic and “enjoy” the ride.

Ps. I know the chart looks like it is about to topple over into its doom… but consider, it looked like that in 2016 too. Check out the ETH fractal projection below, if it does anything like that, averaging in now will end up being a really solid move. If it dies, well, we already covered that above right? That is the risk.

An example of what the future of Ethereum could look like.

Author: Thomas DeMichele

Thomas DeMichele has been working in the cryptocurrency information space since 2015 when was created. He has contributed to MakerDAO, Alpha Bot (the number one crypto bot on Discord),...

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