Buy the dip usually involves trading when the price drops to profit from the supposed value increase in the future. Is it feasible to buy the dip in cryptocurrency?

If you've spent any time reading about investing on Twitter or Reddit, you've almost surely heard the phrase buy the dip. The common piece of advice — which refers to buying a stock or cryptocurrency immediately after a temporary price decrease — has spawned memes and a slew of inventive TikToks as influencers try to explain why the approach makes sense, or, lament when the strategy falls short.

Is buying the dip actually a viable investment strategy?

Buy the Dip on Cryptocurrency

 

What Does Buy the Dip Mean?

Buying the dip refers to purchasing an asset when its price has fallen from a recent peak. Ideally, you're receiving a good deal, and if the price rises, you'll profit.

To many investors, the technique is as simple as keeping a watch on a certain asset and purchasing when the price decreases (for example, anytime the price of Dogecoin dips, there are calls for investors to purchase the dip).

Others are more meticulous in their approach. For example, they may establish a particular threshold, such as 20%, so when the market lowers that far, they enter the market and continue to invest a predetermined amount each month until the market reaches a new high. They'd then start saving money again and wait for the next dip.

Whatever the method, the idea is that in the long run, you will benefit from buying in at generally low prices. But there are big risks.

 

Reasons for the Bitcoin Drop

Before we decide whether to purchase the dip, let's have a look at why BTC fell despite its Taproot update. To start with, China has re-enforced its ban on cryptocurrency mining, describing it as a "very hazardous" practice to the environment.

Furthermore, Twitter's CFO, Ned Segal, affirmed that the company has no intentions to begin investing in cryptocurrencies at this time.

Another cryptocurrency specialist believes that the drop is not natural as people are borrowing money to acquire Bitcoin. Leveraged longs are situations in which purchasers buy with more money than they have. This may be seen in a statistic known as the exchange financing rate, which rises when investors initiate heavily leveraged long positions, causing the price to rise.

However, there is a drawback to this. When a sell-off occurs, frequently by whales attempting to flush people out, investors' positions can quickly fall to zero, forcing them to liquidate their investments. This has a cascade effect, lowering the price even more.

The US Senate is also seeking to improve the excessively broad language in the Infrastructure Bill so that cryptocurrencies can be included. The bill's current phrasing appears to oblige companies like miners and software teams to send data to the US IRS that they may not have access to. The bill's passage, viewed as a barrier to innovation and market expansion, may have had a detrimental influence on the market.

 

Catching a Falling Knife

Buying the dip may soon turn into catching a falling knife, according to Mark Gorzycki, co-founder of OVTLYR, a platform that monitors how investor activity affects stock prices. Buying an asset while its price is declining is referred to as catching a falling knife.

The danger of attempting to grab a falling knife is that you may cut your hands. It's impossible to predict when a falling asset's price will recover – if it will recover at all. And you're losing money as you wait for other buyers to acquire the asset and bring its price back up.

"Just because you purchased it — just because you were a contrarian — doesn't mean the herd will turn around and follow you," Gorzycki adds.

Purchasing the drop in the stock market may make more sense than purchasing the dip in riskier assets such as cryptocurrencies or meme stocks. This is because stock prices are typically linked to a company's financial fundamentals, such as its growth potential and dividends. And these are valuable regardless of the market's current condition. When a stock's price falls, as long as you are confident in its core company, you may be certain that it will one day recover.

However, it is more difficult to predict a comeback when dealing with a volatile asset like cryptocurrency, especially meme coins, whose values are unrelated to fundamentals. The success of those assets is entirely dependent on something unpredictable: hype. And there is no assurance that the original euphoria around them will resurface.

When discussing Dogecoin's popularity increase earlier this year, Richard Smith, CEO of the Foundation for the Study of Cycles and a financial cycles specialist, told Money, "I don't think it's something you could have forecast, or that we can be certain would continue."

 

Time Out of the Market Costs You

Buying the downturn also necessitates keeping some cash on hand in case the entire market or asset you're monitoring falls. However, staying out of the market might have major implications; the market might move too swiftly for you to react, so if you haven't already invested, you'll be left out.

According to J.P. Morgan Asset Management's 2021 retirement advice, missing the stock market's ten finest days during the previous two decades would have reduced your overall return by more than half. The return on a $10,000 investment would have been $42,200 for a fully invested investor, but it would be only $19,300 for an investor who missed those critical 10 days.

According to Stephen Talley, Chief Operating Officer of Leo Wealth, it is far more vital to participate in the market's finest days than it is to deliberately buy in when the market collapses. "It's time in the market that pays the most," he says.

Furthermore, if the market declines but not to the level you established for yourself, you may miss out.

Assume you save money to invest when the market falls 20%. The difficulty is that occasionally the market dips, but not by enough to reach your threshold.

Another scenario is when there are no 20% market declines for you to purchase into, but instead higher than that. In this case, you've passed up an opportunity to profit from those gains. Even if the market instantly drops by 20%, prices will still be 60% higher than when you started investing.

 

Are You Considering Buying the Dip?

The current Bitcoin decline is more of a correction than a depression. When we say this, we don't imply that every downturn is a good time to purchase. In the following days, Bitcoin might go either way. Crypto investments, on the other hand, have produced significant pay-offs for investors who approach them with a long-term perspective.

Here are a few reasons why you should buy the dip:

 

A Zoomed-out Perspective

Bitcoin fell on November 16, 2021, wiping out all of the rest of the month's gains. For the first time in two weeks, it was trading below $60,000 per coin. When Bitcoin found stable ground and began to recover, the weekly drop reached as much as 11%. Bitcoin then moved horizontally throughout most of October, but when we zoom out to annual charts, we see that Bitcoin has doubled in value in 2021 and quadrupled in the previous 365 days!

Cryptocurrency prices vary in the same way that stock values do, with each new development affecting their position on the price charts. Not every downturn represents a buying opportunity, but risk and reward are essential ingredients in any formula for an opportunistic investment. Bitcoin, like the market, is experiencing a correction, but it is still trading higher.

 

This Is Not 2017

Many crypto commentators will recall the aftermath of the 2017 Bitcoin price increase in light of the current downturn. BTC nearly quadrupled in value in the fourth quarter of 2017 before losing 3/4 of its value in 2018.

The Bitcoin price cycle will continue to witness troughs and peaks, but things have changed dramatically. It now has more support from some of the biggest fintech platforms, cryptocurrency and its trading has never been more popular, financial institutions around the world are moving toward crypto adoption as much legislation is in the works, and so on.

Cryptocurrencies in general, and Bitcoin in particular, are accepted by retailers and e-commerce businesses. Global mainstream media coverage is expanding, and numerous prominent brands, such as MicroStrategy and Circle, have a portion of their reserves in Bitcoin. Bitcoin ATMs are being installed in a variety of places throughout the world, and Bitcoin ETFs are finally getting popular with established exchanges and government authorities. And how can we forget El Salvador's decision to embrace Bitcoin as a legal tender?

Bitcoin investing is influenced by fluctuating markets. This is the essence of thoughtful trading. The purchasers of the 2017 rise have had their earnings double today- it all depends on how we look at the trend. Investing in cryptocurrency is not for the faint of heart or the impatient. Markets have always been in motion while swiftly developing.

 

Bitcoin's Taproot Update

The Taproot update to Bitcoin has added functionality to its current privacy features. Many institutional investors and commercial entities who want some amount of secrecy and anonymity in their activities may profit greatly from this latest improvement. Furthermore, the update will result in cheaper transaction costs as well as the ability to use smart contracts and other blockchain capabilities. It would be naive to expect Bitcoin to plummet after such a significant update. It is up to us to determine whether to buy the rumor, sell on the news, or dismiss these gyrations as noise.

Also, for those who follow Dollar-Cost Averaging while investing in Bitcoin, this may be the opportune time to purchase more for less following the downturn. This might be the time to broaden your investing horizon.

In the long term, cryptocurrency investments have paid off spectacularly. Those who are concerned about short-term swings can wait for things to settle down. Bitcoin has a reputation for being volatile, yet there were more volatile assets on the market long before Bitcoin. To keep updated with the changes in Bitcoin, you can always watch Bitcoin Price Today.