Bitcoin and the broader crypto market have been on a downtrend since their all-time highs set in November 2021, while the stock market was bearish in 2022. Many investors would argue this presents a profitable opportunity to buy the dip and hold some solid cryptocurrencies at bargain prices, for the long term – buy low, sell high as the trading mantra goes.
What does “buy the dip” mean?
Buy the dip stands for the process of buying an asset after it has declined in value.
When it comes to the cryptocurrency market, “buy the dip” is used to describe the opportunity of investing in a coin or token that has experienced a short or long-term decline in its price.
By doing so, investors hope to profit from a potential future price increase, at which point they hope to “sell the top”. See our post on shiba inu.
When did the term grow in popularity?
Most cryptocurrency investors became familiar with the term after the downtrend of the cryptocurrency market in 2018. It was during that year that most investors learned how risky and speculative the crypto market really is.
But buying a coin or token in a downtrend does not necessarily mean that its price is guaranteed to increase.
At least for the short term, one should have strong emotional intelligence and understand the turbulent nature of the market.
Is “buy the dip” a good strategy?
The principle of “buy the dip” is based on an assumption price drops are temporary aberrations that correct themselves over time. Dip buyers hope to exploit dips by buying at a relative discount and reaping the rewards when prices rise again.
Crypto markets are volatile, so buying cryptocurrencies at any price – let alone a dip that might become a long-term trend – is risky. While prices could return to previous levels, they could fall even further, leaving your investment underwater.
If the past is prologue, then the current dip (or crash, depending on your perspective) could bounce back as it did last year, when prices fell to similar levels before returning to pre-dip levels and even peaking in the autumn. But of course, they might not.
Bitcoin prices in particular have shown a degree of seasonality to date, appearing to fall in value to lesser or greater extents in the spring before bouncing back in early summer. However, as with every kind of investment, let alone the unpredictable world of cryptocurrencies, past performance is no guarantee of future results.
Oleg Giberstein said: “Many a novice investor has been burned trying to ‘catch falling knives”.
He advises those committed to “buying the dip” to decide on a set amount of money they’re comfortable with using to buy BTC or ETH each month and not to worry too much about what happens to prices over the next two years.
Pavel Matveev of digital exchange Wirex advises buyers to hedge their bets. He said: “It’s important to diversify your crypto portfolios with different altcoins to mitigate risks.”
An uptrend is when an asset’s price moves in a generally upward direction. Its highs and lows are usually higher than the previous peaks and troughs. What this tells you is when the price drops, there’s a very high chance it would rise back up.
Many investors buy the dips when a coin or stock pulls back with the expectation that it will soon return to its original position. While there have been credible successes with this method, it remains a working theory. In reality, there’s no foolproof way to know what an asset will do.
One thing to mitigate the risks involved is to use the signal line. If a cryptocurrency has a known uptrend, its lowest point should never cross this line. Once it does, the coin in question might have entered a downtrend, which makes everyone who bought the dips losers.
Should you buy the dip to enter a crypto network?
Yes, it’s safe to do so. When the prices drop, it’s a good time to buy into a crypto network to start earning more coins. This method is otherwise known as Crypto Staking.
Modern cryptocurrencies like Ethereum and Cardano use a validation system called Proof of Stake. Coin holders can verify transactions to earn more than what they have in the network.
Buying the dips in a Staking network will allow you to start earning at a much lower cost. It will also coincide with the increase in transaction traffic within that network due to the price drop.
Should you buy the dips of well-established crypto?
Bitcoin is a great example of well-established crypto. It’s one of the most volatile assets in history and has survived some of the biggest crashes. The lowest dip of bitcoin happened in 2011 when its price dropped by over 99%. It was a miracle for investors to recover anything at all after that, but they did.
Despite all that, bitcoin has managed to weather the storm of fluctuations and maintained a persistent uptrend since its inception.
It usually comes down to track records. If crypto is still standing after numerous dramatic episodes like bitcoin, it’s likely to recover from a dip.
Should you buy the dip to average down?
When crypto drops in price, many investors will buy even more of it. Doing so makes the average price at which they bought that coin lower. When you appear to have spent less on a coin, its price doesn’t have to go that high for you to make a profit.
For example, you bought 10 of a certain coin for $10 a piece, and today it dropped to $8. Instead of planning to cut losses, you buy ten more coins. Now, you have 20 coins for $180, making the average price of each coin $9. If tomorrow, the price corrects itself to $10, you would make a $20 profit instead of just your money back should you not have bought the dip.
The only problem with this strategy is it’s only good for long-term investments. People who use this technique have a clear and precise vision of how the asset will behave way down the road. These types of investors are unfazed by downtrends and will buy the dips with unyielding conviction.
If you’re not one of those guys or have no long-term plans, try not to overcommit to a single coin.
Should you buy the dip before a crash?
When you can’t determine if the dip is a temporary drop or the beginning of a downtrend, it’s not a good idea to buy.
Many things can cause a crypto dip. Network overload, account hacks, and regional bans, just to name a few. Usually, when an influential corporation announces acceptance of crypto, it’s a sign the price of that coin will rise. If that same corporation decides later to stop accepting the crypto, its price will likely decline.
Before buying the dips, make sure to determine what has caused them and if the market would correct itself later.
Should you buy the dip of new coins?
When a new coin or token hits the market, it often maintains an uptrend for the first few cycles. This is the excitement period where everyone is buying into enthusiasm rather than financial vision.
Eventually, a dip will come and it can mean one of two things: it’s temporary and will come back up even higher or people have lost interest and are cashing in their early investments. In the case of the latter, it’s a terrible idea to even consider holding it, let alone putting more money into an imploding bubble.
Everyone likes a good opportunity, but an opportunity is only as good as what you’re willing to invest in it. Crypto dips happen all the time, but not all will recover. One of the best ways to take advantage of them is extensive research. More often than not, you’ll find information more valuable than the bargain of a slight dip.
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