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Buying the dip is a rallying cry on social media, but it’s not always a good idea.
- Only buy the dip if you have money to spare and have researched the investment.
- Crypto prices are extremely volatile and could fall further.
- Timing the market is almost impossible, but buying when prices are low can work for long-term investors.
“Buy the dip” has become somewhat of a rallying cry on social media amidst ever-falling crypto prices. Indeed, El Salvador president Nayib Bukele — a well known crypto enthusiast — has been buying the dip for his whole country. Buying the dip is when you pick up an asset after it’s fallen in value.
As an investment strategy, the idea of buying low and selling high seems to make sense. But, like many investment strategies, it’s easier said than done. Bear in mind that if you’d bought Bitcoin when it first “dipped” in early January, your investment would still be worth almost 60% less today. It’s very hard to know how low crypto might go, which is one of the biggest challenges for dip buyers. Here are three times when buying crypto on the dip can make sense.
1. When you have cash to spare
The golden rule of crypto investing is to only invest money you can afford to lose, and that especially applies to dips. Falling prices can create a false sense of urgency. There’s a fear that there might only be a short window before crypto rallies again. This can cause investors to spend money they actually need for other financial goals. Don’t do it.
The ideal scenario is that you use money you’d already earmarked for crypto investing. For sure, it doesn’t make sense to buy the dip if you’re behind with your retirement contributions or don’t have a fully stocked emergency fund. If you are trying to pay down high-interest debt, always prioritize this over any crypto purchases. Buying the dip shouldn’t stop you from building solid financial foundations.
2. When you believe it’s a sound long-term investment
Do you have things at the back of your cupboards that you bought on sale, thinking they were a bargain, only to find you never use them? Whether you’re shopping for real life items or cryptocurrency, a bargain is only a bargain if it’s something you actually want. In crypto terms, that means only buying projects you’ve researched and believe will perform well in the coming five to 10 years.
Here’s the thing: Cryptocurrency prices could still fall further, and some may fall to zero. We don’t know what is going to happen in the crypto market, particularly what impact future regulations might have. Many projects came out of the crypto frenzy of 2020 and 2021, and there’s a good chance a lot of them will fail. Those that are poorly thought out, overly experimental, or don’t have utility are particularly at risk. Only buy cryptocurrency on the dip if you actually want it and see value in it.
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3. When you’re not trying to time the market
A lot of the time the idea of buying the dip is associated with short-term trading rather than long-term investing. The idea might be to try to buy low and then sell when prices increase. But how do you know when an asset has hit the bottom? And how can you be sure it will recover its previous highs? In stock investing, the adage that time in the market is better than timing the market usually holds true — especially for retail investors.
Buying the dip can be part of a buy-and-hold investment strategy, especially in a volatile market like crypto. Perhaps you identified a coin or token you wanted last year, but were reluctant to buy in when the prices were at all-time highs. With prices at 18-month lows, now might be a good time. One of the difficulties here is deciding when to jump in. There’s a risk of hesitating too long on the sidelines and never actually buying anything.
It can make sense in a speculative industry like crypto to try to nibble the dips. For example, if you think Bitcoin might eventually go on to reach new highs, you might try to buy small amounts each time it sinks lower. You’re essentially accumulating during these difficult times in the hope that you’ll eventually see decent gains.
However, it is only useful if you don’t spend money you need — preferably money you’ve set aside waiting for the right time to jump in. You need to be prepared for potential further price drops, or for the price to fall to zero. Most of all, if you buy Bitcoin or any other crypto at low prices, it’s important to have done your research and understand what you’re buying ahead of time.
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