TL;DR
- Crypto prices can plummet 20% to 50% within a day. During the 2018 crash, Bitcoin suffered an 80% loss of value.
- In 2022, Bitcoin has plunged more than 52% (YTD) and is now hovering around $20,000 per coin.
- A dip is a temporary, moderate decline in an asset's price. The term "buy the dip" refers to a trading technique of buying an asset at a low price and selling it once it appreciates in value.
- Buying the dip might reduce the upfront cost of entering a position, but it's important to keep an eye on the risk/reward ratio.
- Contrary to popular belief, buying the dip is only lucrative in a bullish situation.
- The biggest risk in buying the dip: prices could fall further, leaving your investment in the red for a long time.
Should I Buy The Dip?
In 2018, Bitcoin suffered an 80% loss of value, which brought the prices of other cryptocurrencies down as well. In 2022, the price of Bitcoin has plunged more than 52% (YTD) and is hovering around $20,000. Compared to its all-time high of around $69,000 in November of 2021, the most popular cryptocurrency has lost around 70% of its value.
We’ve seen crypto prices plummet 20% to 50% within a day and with the low prices of some cryptos, it begs the question: Is there a way to take advantage of the ebbs and flows of the crypto market? And most importantly, Should you buy the dip?
What does it mean to “Buy The Dip”?
A dip is defined as a sudden temporary decline in an asset's price and the term "buy the dip" refers to a trading technique wherein the investor "goes long” during a period of market weakness and sells it once the market recovers from the correction or consolidation.
According to the Elliot Wave Theory, the market will follow the main trend, and investors who purchase during intraday corrections or isolated consolidations will stand to gain when the market finally consolidates in line with the broader trend.
Buying the dip can reduce the upfront cost of entering a position, but keeping an eye on the risk/reward ratio is important because it might not be the best time to purchase if the market continues plunging.
How to “Buy The Dip” in crypto?
Buying the Dip does not mean buying any crypto with a bloody chart. In a bear market, everything is bloody but it won’t make sense to purchase everything, hence here are some steps to consider to make buying the dip easy:
Identify the Broader Trend
Contrary to popular belief, buying the dip is only lucrative in a bullish situation. Therefore, cryptocurrency traders or investors should verify the underlying trend before buying the dip, once the bigger picture is established, it’s time to adjust the purchases accordingly.
The general trend of the market can be determined by following the lines of the moving average convergence divergence (MACD) indicator. The MACD indicator is a momentum oscillator that consists of two lines: a longer period moving average line and a shorter line. For example, when a shorter MA crosses a longer MA, a change in direction may be coming. On the contrary, when the long-term MA crosses below the shorter MA, the price may rise.
Spotting the True Market Dip
There is no foolproof method for locating the “dip”. However, a candlestick chart can show Support and Resistance levels which can provide the optimal point to buy, or at least give us some indication of a dip.
When a crypto's price goes to a low point in a time period, some call it a Support level. When the support line is tested, one can say that it has found strong support.
When a support level is found, buyers step in to prop up the market.
Conversely, when the price of crypto hits a ceiling or a resistance level and fails to break through it, we call it Resistance. During this time, sellers can step in to take their profits, prompting the price to fall.
In a positive trend, a price dip is a significant price drop that occurs well above the support line. A trader can go long on the cryptocurrency in the red area and close the position once it reaches green.
A reversal in the trend would be imminent if the price dropped near the green support line. For example, if the candlestick breaks through the resistance line and begins a downward trend, it could indicate a reversal, which is not ideal for “buying the dip”.
Research Why the Dip Occurred
When buying the dip, you have to consider that the drop in prices will eventually recover. The cost of crypto may abruptly decline for reasons unrelated to the blockchain’s long-term performance and roadmap but could be due to macro events, news, or even just Tweets from influential people.
For example, Elon Musk has the power to manipulate cryptocurrency prices and move crypto markets by merely posting a tweet. But, in many cases, price movements are usually caused by fundamental factors related to the crypto's development or adoption.
#Bitcoin 💔 pic.twitter.com/lNnEfMdtJf
— Elon Musk (@elonmusk) June 4, 2021
Another example of macro events affecting prices is the effects of the war in Ukraine on the world economy. By monitoring world news and staying up to date on news relating to the crypto you are looking to purchase, it can open up some opportunities for you to enter the market.
Alternative Strategies vs. Buying the Dip
Instead of putting all your eggs on the dip in one go, dollar-cost averaging proposes another way to profit during a bear market. Dollar-cost averaging employs the regular purchase of an asset over a consistent time frame regardless of the price of the asset. In doing so, you can accumulate the said asset at different price points and ideally lower your cost basis for the asset.
Long & Short Positions?
By leveraging on derivatives like futures and options, one can make some profits without directly owning an asset because futures and options are contracts to buy or sell the underlying asset at a certain time in the future.
Leverages increase the risk of your funds because you might get hit with liquidations if you do not have enough collateral to continue holding the contracts. Hence, adopting leverage as a strategy is generally not recommended for beginners new to cryptocurrency.
Think of it this way: HODL-ing crypto is a bit like investing in a tech company in its early stages.
Passive Income with Crypto
There will be people who are bad at trading and don’t wish to take on the additional risks that futures have. One can consider other strategies like yield farming, staking, and liquidity mining to generate some income and grow their wealth.
The Risks of Buying the Dip
The crypto market is unpredictable and many have lost money trying to buy the dip because there’s always a dip after the dip and if the trend is moving downwards, it might take some time for the market to consolidate and correct itself. Many inexperienced investors have suffered losses by trying to grab the falling knives when prices keep dipping and dipping over a long period of time.
Time in the market beats timing the market.
It remains unclear when a bear market will turn around, when a bull market will take over, or if this is just a transitory blip. But staying up to date, doing your own research (DYOR), and increasing your financial knowledge will open up opportunities that you never knew existed.
Disclaimer: The information and publications in this article are not intended to be and do not constitute financial advice, investment advice, trading advice, or any other advice or recommendation offered or endorsed by Coins.
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