The first time I heard the word "dip" was at the end of May 2021. Bitcoin was at the beginning of a crash that would end up wiping out billions of dollars. Several factors contributed to this situation: from China's decisions to Tesla revealing that the company would no longer accept bitcoin payments. I had invested €1000 in Bitcoin just a week before prices started to drop. So there I was, looking at my money losing value way too fast. While talking to a friend and explaining to him how I was planning on selling everything, he said a sentence that caught my attention, "Never sell anything during a dip!". His assumption might be a bit too extreme for many people, but I'm also a newbie in the crypto world, so I decided to investigate. I discovered that in most online sources, people constantly use the expression "buy the dip". But what does it mean? And what is a dip? Is "buying the dip" worth it?
When talking about an asset, crypto, stocks, or anything you're investing in, people use the word dip to describe the asset's price dropping. "Buying the dip", even if it sounds rather simplistic and even silly, means buying when the price is sinking or low.
After an asset's price drops from a higher level, some traders and investors view this as a good time to buy or add to an existing position. The theory of price waves is the basis of the concept of buying dips. If you're not an expert, let me quickly explain it to you. In the 1930s, a retired technical analyst named Ralph Nelson Elliott studied 75 years of different indexes in the stock market. This massive study resulted in a theory that says that stock price movements can be predicted because they move in repeating up-and-down patterns called waves. Investors' psychology or sentiment creates these waves.
The concept of buying the dip relies entirely on this theory. Some traders say they are "buying the dips" if an asset drops within an otherwise long-term uptrend. The hope is that the uptrend will start again after the drop. Others say it when no uptrend is happening, but they believe an uptrend may occur in the future. In both cases, they’re buying when the price drops, hoping to profit from some potential future price rise.
Relatively easy, right? Well, not exactly.
In practice, applying this concept to real investment is not as easy as it seems. The main issue is understanding the difference between a momentary drop in price and a warning flag that the prices are about to go much lower. Specifically talking about crypto, it's extremely common to see small weekly dips and huge dips every few months. Timing the bottom of these dips is nearly impossible. That's why the "buy the dip" strategy is hazardous. A risky choice at the right time could make you a fortune. But the opposite could also happen.
You looked at cryptocurrencies for a while, waiting for them to become more affordable. Now it seems that a dip is happening, it’s the perfect time to finally invest right? Before you start seriously thinking about it, it might be worth keeping a few points in mind.
Is it the right time for you? Buying something just because it's on sale it's never a good idea, and the same principle applies to crypto. The average investor has very little ability to distinguish between a temporary drop in price and a warning signal that prices are about to go much lower. Think if you can handle the risk that comes with crypto. I will never get tired of saying this: make sure you have an emergency fund and a well-diversified portfolio before you even consider buying crypto. If you put every spare euro in cryptocurrencies and prices continue to fall, you may be putting your financial future at risk. Think of your general situation. In case of an unexpected expense, you may be forced to sell your crypto investment earlier than planned, and if prices have plummeted, you could end up losing a lot of money.
Be smart while choosing your crypto investment. Not all cryptocurrencies are the same, and some have more possibilities to succeed than others. When buying stocks, you would examine a company's earning reports and future plans, right? Same here, you should review the project behind a cryptocurrency to determine whether it's likely to grow over time. Consider if the currency already has real-world uses. Trendy cryptocurrencies might see their prices spike in the short term, but they're less likely to see long term growth.
Understand how volatile crypto is. When buying the dip, the general assumption behind it is that prices will eventually go up again and that by buying now, you're going to see higher earnings. Well, we're at the very beginning of the crypto movement, and no one knows what will happen. It's still unclear if it will survive in the long term or not and, even if many cryptocurrencies managed to bounce back after previous crashes, there is no guarantee that they will always recover. So, don't take for granted the assumption that what happened in the past will happen in the future.
In the end, “buying the crypto dip” means betting that decentralised finance will become the future. With the information we have now, it does feel like playing the lottery. It's not for everyone, and you should really do your homework before investing money in it and avoid getting led by the hype. Hey, you could also be one of the lucky ones and make a fortune out of it; only time will tell. As always, the choice is up to you.
One last suggestion: try to be better than me and avoid becoming a living sponsor of the buy high, sell low meme trend. It's not worth it.
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