Buying the Dip: Is This a Profitable Tactic?

Investors are looking for strategies to profit from the crypto’s high volatility. Constantly anticipating the market seems impossible since prices move in ceaseless ups and downs. Nonetheless, there are patterns that crypto enthusiasts believe are driven by factors such as market sentiment, crypto’s utility, and whales. This philosophy has brought about the so-called “buy the dip” strategy.

Even the kings of cryptos, Ethereum and Bitcoin, have witnessed some significant dips lately, with fluctuations that opened opportunities for some but closed doors for others who could not gain the most out of the drop.

There is no doubt – purchasing a cryptocurrency or stock right after a temporary fall in price has generated a buzz lately, so increasingly more individuals are interested in leveraging this tactic. Does it make sense? Is it going to generate profits? Let us find out!

What does “buying the dip” mean?

As its name also implies, the “buy the dip” strategy refers to the process of buying a digital asset at the moment when its price decreases so that you can sell it later when (hopefully) the price exceeds the purchase value. You can use the “buy the dip” tactic in all kinds of assets, from currencies and stocks to indices and commodities. Purchasing a particular cryptocurrency when the overall market turns bearish and then selling it when the market recovers in value have become one of the Internet’s favorite strategies, but it would be helpful to know that it does not benefit everyone. You cannot jump to buy an asset knowing little to nothing about it because that is not how things work. The same is true for any other crypto strategy out there, so ensure you take your research more than seriously before going on this adventure.

Generally, individuals who purchase the dip already have shares of an enterprise whose price has dropped from a recent peak. Dip buyers use short-term price movements to enhance their holdings because they somehow know that a particular asset will regain its initial value or even exceed it. How? They are aware of factors like market sentiment and influential investors aka whales’ next moves.

If you are not confident enough in this strategy, you can adopt a more systematic approach to see if it is really profitable. Consider, for example, setting a threshold of 20% or 30% and investing to save up fiat money when the market falls. Then, continue investing an established amount monthly until the market rebounds. Continuously saving cash while waiting for the next drop puts you at a significantly lower risk of losing.

“Catching the falling knife”

Mark Gorzycki, the co-founder of OVTLYR, compares the “buy the dip” strategy with a try of “catching a falling knife”, as investors choosing to purchase the dip do not know for sure if that cryptocurrency will eventually increase in value. The “falling knife” refers to the price that is dropping – but what if the knife ultimately chops off your hands? Thus, just because you caught it, i.e., bought the dip, does not mean it will suddenly snap back. It is, indeed, a risky job, but, as the saying goes, “no guts, no glory”. The ultimate measure you can adopt is to research the market thoroughly. Understand the growth potential and dividends of the asset that have caught your interest – there is no way to fail.

How to buy the dip

Investors that adopt the “buy the dip” tactic purchase assets under certain conditions, storing cash so they can buy when the market rebounds. And many of them have succeeded, but remember that they usually have the right strategies. As the crypto market is a real Wild West today, it is more than mandatory to act with caution when buying the dip.

So, here are some valuable pieces of advice to have in mind:

Understand why dips happen

These dips happen for a reason – or several reasons? Correct. There are many factors influencing the prices moving down, including news, macro events and, obviously, Tweets! Remember when Elon Musk announced that he was going to accept Bitcoin? Then, the king of crypto increased so much in value that it was believed it would just explode. Such factors, along with political unrest, can significantly influence the value of an asset, and no, it is not always about rises but also declines, the so-called “dips”.

So, in this roller coaster of price ups and down, it is essential to be informed before investing in a particular asset. If you are interested in buying Ethereum, for example, which is also expected since it is a highly volatile cryptocurrency, first ensure you check the ETH price chart that should be updated in real-time on Binance.

Do not purchase on impulse

In the crypto game, you would better let your emotions aside. It is easy to fall into the trap of buying on impulse, particularly when a market experiences constant price declines. But if this becomes a habit and the falls in prices are prolonged, you might deal with a bear market. Extreme events such as war, pandemics, and a slowing and unstable economy can result in a bear market. As a consequence, prices are dropping, but it is unknown for how long. Thus, you would better assess the risks and your financial condition. What if prices stagnate and no increase is expected? In this case, are you prepared for a potential financial loss? 

Act long-term

While day trading can be a viable solution to earn money in a short period, it is not always the most recommended. Some investors understand that prices fluctuate on a regular basis, with ups and downs permanently alternating. If so, one cannot talk of a significant gain. Instead, more investors started adopting a long-term perspective and ignoring short-term fluctuations. When investments are held for a more extended period, chances for them to rise to much-improved levels are higher. Besides, there are much lower tax rates than if you sold the assets every day. Indeed, buying and holding requires patience, but it is a practice that can do wonders if used strategically.