During bear markets, value of cryptocurrencies like Bitcoin and Ether are in a downward trend and “buy the dip” could be commonly heard or read by new crypto enthusiasts.
What does Buying the Dip mean?
Buying the dip is when crypto traders invest on the lowest market value of a cryptocurrency, hoping or assuming that when the market goes up again, there will be an opportunity to sell for profit.
However, before buying the dip, there are factors that must be taken into consideration: factors that possibly create the dip, the status of the individual’s mental and emotional state, volatility of the market, managing risks, and limitations of buying the dip.
This article is not intended to be financial advice but as a guide for aspiring crypto traders. Always do diligence in research before investing in cryptocurrencies.
Analyze the Factors that Possibly Created the Dip
There are factors that can lead to a dip. In trade, there is fundamental and technical analysis of the market.
Fundamental analysis is done by checking current events surrounding the cryptocurrency and even the economic status of major countries that can impact the market. Events surrounding the cryptocurrency are usually about the status of the team behind the project, the activities of the community that could probably affect the value of the crypto, to which blockchain it is associated with, and more.
Check the documentations, like whitepaper, of crypto projects to see what updates they have. If the documents of the project are not available, Discord servers or Telegram can be a gauge to the temperature of the community and see updates from the developers.
Usually, whatever happens to Bitcoin, whether it goes up or down, the altcoins or other cryptocurrencies follow.
Trader’s Mental and Emotional State
It is important for crypto traders to check how their mental and emotional states are. Sometimes the fear of missing out (FOMO) can be a factor to impulsively buy cryptocurrencies because other traders on social media say the dip is a buying opportunity. There is a tendency of buying the crypto when it has already risen from the dip. There are instances that the market suddenly falls creating another dip that can potentially lose more from the initial investment.
Others may also feel the tendency to sell out their investments or panic sell when there is news of a possible drop in the market especially when there is a huge dip, also called as corrections and crashes. These are driven by emotions without carefully analyzing the market and checking news in reference to their investments. This could lead to regret and frustration.
Check the Volatility of the Market
The other way to analyze the market is through a chart or by technical analysis. The crypto market is very volatile and learning to analyze the chart and understanding indicators can help make sound decisions for traders. Some would try to zoom in and out of the chart to see the trend of the market for months long, to day-long chart, to an hour-long chart, to a 15-minute chart. just to see the history of the market for those periods of time. It is better to take much time before deciding on when to invest in a cryptocurrency.
To better understand charts, invest in learning by studying and seek advice from financial advisors.
After having sound knowledge about volatility of the market and possible factors that are affecting it, managing risks is an important part of buying the dip.
In buying the dip, it is important to establish risk parameters:
- Set the amount of money for investment and for other usage. Only invest using money that one is willing to be lost. Leave some money for other expenses and savings.
- Have that discipline during price decline. If the threshold is a 20% decline, don’t be tempted to hope for more decline in the price.
- Use a stop loss. This is normally found on trading platforms. This prevents further loss if the market price continues to decrease.
- Be aware of longer-term downtrends. When the market continues to decline, it is probably not the time to invest. But when there is a recovery or an uptrend on the market, it is probably best to buy the dip.
- Be aware of personal biases. Doing a lot of research on a project can help remove any biases that can become unsound decisions and could lead to regret afterward. Gathering facts and data can help in investing at the right moment.
Limitations of Buying the Dip
Buying the dip does not guarantee profits, like all trading strategies. A cryptocurrency can drop for many reasons, including changes to its underlying value. Not because it is cheaper than before does not necessarily mean the crypto represents good value.
Average investors have very little ability to distinguish between a temporary drop in price and a warning signal that it will go much lower. This uncertainty of the market can be a factor when doing a dollar-cost averaging (DCA). It can be beneficial to accumulate gain or it can be a recipe for disaster. Dollar-cost averaging is a strategy of dividing the investment into equal portions and investing on each trench or dip that a crypto has.
For more information about DCA, refer to BitPinas article on 5 Things to Do During Bear Market.
During bear markets, there are risks involved in buying the dip. A crypto trader should rely on the data he got from his research and analysis of the market and not base it on impulses and panic. Learning the fundamental and technical factors affecting the market can aid in making good decisions on when to buy the dip or not. Without careful analysis of the market and discipline, it would be a huge gamble for a trader and may affect them when there is a huge loss.
There are risks in crypto trading. Investors need to have proper strategies that can lessen loss and being aware of the limits of buying the dip can make better decisions.
This article is published on BitPinas: Should I buy the Dip? 5 Things to Consider
Disclaimer: BitPinas articles and its external content are not financial advice. The team serves to deliver independent, unbiased news to provide information for Philippine-crypto and beyond.