The high cost of 'averaging down' in a crypto bear market

Looking back at the tail end of 2021 and early 2022, my biggest mistake in crypto wasn't picking the wrong coins per se, but rather my approach to position sizing and risk management in a changing market dynamic. I'd had a good run through 2020-2021, and that success, I realize now, bred a certain overconfidence. When $BTC started to show signs of weakness, breaking through key support levels, my initial impulse wasn't to cut positions or re-evaluate. Instead, I leaned into the 'buy the dip' mantra, aggressively averaging down. The thought process was, 'it's crypto, it always comes back,' and I had conviction in the projects themselves.

The problem wasn't the projects, it was the market cycle. My capital, which had been diversified, quickly became concentrated in a few tokens as I kept adding to losing positions. My average entry price got lower, sure, but the market kept going lower too. This tied up a significant portion of my portfolio in underwater positions, severely limiting my ability to capitalize on the few bounces that did occur, and more importantly, exposing me to outsized drawdowns. When the Luna/UST blowup happened, I had already bled a lot of capital, and while I wasn't directly in those, the systemic shock just amplified my existing problem. It was a harsh lesson on the difference between averaging down in a healthy consolidation versus catching a falling knife in a confirmed bear market. Now, my default is to trim into weakness, not add, and only re-evaluate after clear signs of a bottom and strength return.