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What Does it Mean to Buy the Crypto Dip?

October 23, 2022 - 7 min read

Is now a good time to purchase the dip? Investors who “buy the dip” hope to find good deals when the stock market drops.

After a market crash, the phrase “buy the dip” is often heard as traders discuss their strategies in the open. Eventually, when the market recovers and prices go up again, you’ll want to sell it.

The crypto dip can be manipulated in many more ways than just the mentioned ones. There’s a lot to think about before making a purchase, such as the optimum time to buy and how much of each coin to buy. After the recent crypto market meltdown, investors may seek a way to profit from its volatility, hoping the downturn will be temporary.

What Does “Buy The Dip” Mean?

In the cryptocurrency market, “buy the dip” refers to the opportunity to invest in a coin or token that has experienced a short or long-term price decline. The belief is that the new lower price represents a bargain because the “dip” is only a short-term blip, and the asset will bounce back and increase in value over time.

A “buy the dip” strategy is typically used to make a short-term profit on a stock’s downdraft, whether as a day trader or a swing trader who may stay in the stock for weeks or months. In either case, the trader is frequently looking to profit from a stock that has been oversold, which means that it has declined too much in too short a period and is, therefore, due for a rebound.

This is not a buy-the-dip strategy in which you buy great companies and let their business performance drive your returns. Instead, it’s all about timing the market, getting ahead of other traders, and out before investor sentiment shifts.

If an investor is already long and buys on dips, they are said to be averaging down. Averaging down is an investing strategy that involves purchasing additional shares after the price has dropped further, resulting in a lower net average price. However, if dip-buying does not result in a subsequent upturn, it is said to be adding to a loser.

Should You Buy the Dip in Cryptocurrency?

The assumption underlying the “buy the dip strategy” is that price drops are only temporary and that prices will, in the long run, reach their previous levels. Typically, investors that choose this strategy benefit from the ability to purchase high-quality assets at a discount and then turn a profit after prices have returned to their previous levels.

The cryptocurrency market is characterized by greater levels of volatility than other markets. Therefore, regardless of the price, purchasing cryptocurrencies during a dip that has the potential to last for a significant amount of time poses a considerable risk.

There is a chance that the price of cryptocurrencies could recover, but there is also a chance that they will fall even further, leaving you and your investments in a precarious position. The latest drop in the price of cryptocurrencies might result in a rebound similar to the one seen in 2021, but it also might not be able to.

If you are dead set on buying the dip, you first need to calculate how much money you are willing to spend on cryptocurrency purchases each month. In addition, make an effort not to worry unduly about the potential changes in price that may occur over the following few years.

It would be best if you also thought about hedging your holdings of cryptocurrencies. It might be beneficial to diversify your holdings by purchasing several alternative coins (altcoins) to reduce the potential for loss in your cryptocurrency investment portfolio.

Investing Strategies to Consider if You Want to Buy the Dip

If you’re thinking about buying the dip for the long term, you have a few options for generating significant returns. Here are three of the most well-known:

  1. Invest in the top assets in a bowing industry

If an entire sector has collapsed because investors have turned against it, you may have an opportunity to buy the top one or two cryptos in the industry. You’ll be able to identify the most competitively advantaged players and buy them before the industry returns to investors’ favor in a few years.

  1. Buy the well-known cryptocurrencies 

Bitcoin is an excellent example of a well-established cryptocurrency. It is one of the most volatile assets in history, having survived some of the most devastating catastrophes. Bitcoin’s price decreased by more than 99% in 2011, its lowest point. It was a miracle that investors could recover anything after that, but they did.

Despite this, Bitcoin has been able to weather the storm of volatility and maintain a consistent ascent since its birth. Track records are frequently the deciding factor. If crypto survives multiple dramatic incidents, such as Bitcoin, it will likely recover from a dip.

  1. Invest in the market using an index fund 

If you don’t want to undertake the legwork of investing in particular stocks or sectors, you can still invest in the market through an index fund. A fund based on the S & P’s 500 Index can give you a stake in hundreds of America’s most outstanding stocks, and you can buy when the market is down. It’s an excellent choice for investors who don’t have the time or energy to devote to more rigorous investment, and it’s also Warren Buffett’s recommendation for most investors.

  1. Get some dips when there’s a rise in prices

When the price of an asset goes up in a general way, this is called an uptrend. Most of the time, its highs and lows are higher than the ones that came before. This shows that when the price goes down, it is good to go back up.

When a coin or stock falls, many investors buy it because they think it will soon return to where it was before. Unfortunately, even though this method has worked in the past, it is still a working theory. In reality, there is no way to know what will happen with an asset.

One thing that can be done to lower the risks is to use the signal line. For example, if a cryptocurrency is known to be going up, this line should never be crossed. Once it does, the coin in question may have started to go down, meaning everyone who bought dips lost money.

Reasons That You Should Buy Crypto Dips

Even though cryptocurrencies have only been around for a little more than a decade as of 2009, there is already a reasonably clear market cycle around the “Bitcoin Halving” event occurring approximately every four years. The rewards for mining Bitcoin will be cut in half due to the halving, which will make it twice as difficult to mine new Bitcoins and consequently slow the rate at which the global supply of Bitcoin is growing.

This tendency has generally been observed just before a significant spike in price, with the cost of Bitcoin has increased by as much as 10,000% from the bottom of the cycle to the top during past cycles. And as the price of Bitcoin goes up, the cost of the entire cryptocurrency market follows suit and sometimes even goes up more.

The four-year market cycle hypothesis predicts that 2022 will signal the beginning of a bear market for cryptocurrencies (also known as “crypto winter”) that will last until the second Bitcoin halving, which is expected to take place sometime in the early years of 2024. Bear markets are characterized by persistently low prices, so now can be an excellent time to build up your holdings of Bitcoin and other cryptocurrencies that you believe will survive the next cycle.

Final Thoughts

Experts say that the best time to invest in cryptocurrencies is when prices are low, but only after you’ve determined your risk tolerance and prioritized other aspects of your finances. You should only invest what you can afford to lose in your cryptocurrency strategy as a whole. According to most experts, you shouldn’t put more than 5% of your portfolio into cryptocurrency.

If you decide to buy the dips, do it cautiously and after carefully considering the risks. Another option is to create a risk-adjusted asset allocation that considers your short- and long-term goals and invests your entire portfolio accordingly.

To level up and gain a deeper knowledge of all things related to the future of the cryptocurrency industry, check out the latest content in the Supra Academy section.

Disclaimer: This article should not be used as the foundation for making investment decisions, as a suggestion to enter into any transaction, or as a suggestion to partake in any investment strategy. 

References

  1. Gailey, A. (2022, 19 Aug). Should you buy the crypto dip while bitcoin and Ethereum prices are down? Here’s what experts say. NextAdvisor with TIME
  2. Hooson, M. & Leggatt, J. (2022, 5 Sept.). Crypto crash: Is now the time to buy the dip?. Forbes Advisor
  3. The crypto dips – 3 reasons you should buy (and 3 why you shouldn’t). Liquid
  4. Mitchell, C. (2007, 28 Aug.). Buy the dips definition and examples. Investopedia. 
  5. Mitra, M. (2021, 1 Dec.). Does ‘Buy the dip’ actually work? What experts think of the internet’s favorite investing strategy. Money
  6. Buying the dip? Things to keep in mind. Moneycontrol
  7. Swenson, S. (2021, 20 Nov.). What does it mean to buy the dips?. The Motley Fool
  8. Wade, J. (2022, 29 July). Should I buy the crypto dip?. Money Crashers.

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