Buy the Dip: Should You Buy the Bitcoin Dip?
At some point, you may have heard the phrase, “buy the dip.” After crypto burst onto the popular scene, investment catapulted the price of many crypto coins higher, creating strong uptrends. When this happens, traders may develop FOMO and decide to buy even at high prices. However, buying the dip allows traders to use any corrective dip in price as an opportunity to buy Bitcoin at a cheaper level.
There are risks involved with buying dips in price, as a small dip may simply be the beginning of a large market crash. Market crashes are nothing new to Bitcoin, which has a history of correcting more than 75% — rendering “buy the dip” as a debatable strategy. Is buying the dip the best strategy for you? Let’s explore this topic further to find out.
What Does It Mean to Buy the Dip?
“Buying the dip” is another way to say that you’re purchasing a financial asset after it’s fallen in value. While the asset is falling, it’s said to be in a “dip” where prices are lower than the previous high. When the market has been in a longer-term sustained uptrend, this dip in price presents an opportunity to buy more shares or coins at a discount. This way, if the market returns to new highs, you’ll have more shares or coins, which enhances your future gains.
Buying the dip is a universal trading strategy for most financial assets in the stock market or crypto market. But it’s an especially popular strategy for trading Bitcoin because crypto trends tend to be unusually long and strong. As a result, it’s challenging for traders to catch the opportunities, which results in traders buying at higher prices. Therefore, waiting for a corrective dip to unfold provides traders an opportunity to enter into the position at a cheaper price and accumulate more coins than if they bought them at a higher cost.
Dip buying can appear in any financial market — stocks, commodities, futures, forex and crypto. However, buying the dip in crypto can be different from employing the strategy within other financial markets.
Typically, the trends in the crypto market are stronger and the volatility is substantial. Therefore, when a corrective dip unfolds, the correction in crypto can be more significant than in other financial markets.
Take Bitcoin in 2021, for example. Bitcoin started the year by doubling in value. As the price continued to ascend, corrective dips were relatively shallow, between 18% to 31%. However, when Bitcoin’s price reached $64k, a larger crash began to unfold in the summer of 2021 which resulted in a 55% correction.
This is the biggest challenge in buying the dip with crypto. You may buy on a 20% corrective dip, only to find the crypto market eventually crashing over 50%. A long-term investor (HODLer) believes that buying the dip simply allows them to garner more coins while crypto is still early in its adoption stage. Their rationale is that if the price increases dramatically, their stash of coins could produce life-changing wealth.
How Does the Bitcoin Dip Happen?
There are many reasons why prices dip for Bitcoin that range from political instability, regulatory measures, and community influence. For example, the changes in the global economy are driving investment away from Bitcoin. The global pandemic of 2020 slowed commerce down, grinding businesses and economic activity to a halt. Due to citizens having doubts about their future employment, they pulled back investments in anticipation of lower pricing.
In addition, the news cycle may create short-term dips. In 2021, China cracked down on Bitcoin miners, making it illegal for them to do business there. As a result, a majority of Bitcoin nodes shut down or had to move their operations somewhere else, making the Bitcoin network less secure as there were fewer nodes to verify transactions.
Sometimes, an asset is simply overbought and needs to consolidate its previous gains. There are technical indicators traders can apply to price charts to determine if a technical price correction is about to unfold. One popular technical tool to use indicates bearish divergence.
Going into the April 2021 high, Bitcoin was exhibiting technical price divergence. Higher price highs kept forming, while the relative strength index (RSI) indicator was displaying lower highs. Especially after a long uptrend, this RSI divergence implies that a potential price correction may unfold. A trader buying the dip who spots this signal can choose to wait for a cheaper price before buying more coins.
Most of these reasons are explained away by Bitcoin enthusiasts as FUD, a crypto slang acronym for fear, uncertainty and doubt. Many people still don’t believe investing in cryptocurrencies is wise, since there aren’t time-tested cash flows or proven ways to value crypto networks. This results in FUD, causing investors to question their investments — and to consider selling their Bitcoin.
Does Buying the Dip Work for Altcoins?
For some altcoins, the strategy of buying the dip can be utilized. A few altcoins that are large enough and within the top 20 by market cap could be candidates for buying the dip. This is because there are enough buyers and sellers to balance each other out so that the larger price trends appear on the chart.
Unfortunately, for altcoins with a smaller market cap, buying the dip could be disastrous. Smaller altcoins are much riskier and more susceptible to fraud or compliance risk, making their prices extremely volatile. As a result, a small altcoin’s price might crash and never recover — so that investors need to be careful not to allocate too many funds toward them.
Catch a Falling Knife vs. Buy the Dip: Differences
The evil cousin to “Buy the Dip” is “Catch a Falling Knife.” The falling knife analogy is used by traders to suggest that the market is crashing, and may not rebound anytime soon. Suppose that a knife is dropped from an all-time high above. If you were to stick your hand out and try to catch it, you might get cut up pretty badly. There’s a chance you could catch the knife without hurting your hand, but are you willing to take the risk?
This is how it is when markets are crashing. Traders might see lower prices and decide to buy in anticipation of a rebound. However, that rebound might not come for several months — or even years. Traders involved in the 2018 crash are familiar with this phenomenon, as the bear markets lasted for 11 months and collapsed 85%.
The big difference between catching a falling knife and buying the dip is that dips tend to be relatively small and contained within the context of the larger uptrend. Retracements of 20–40% are normal in crypto.
On the other hand, a falling knife is more like a crash or a collapse, where the vast majority of the price is retraced swiftly and deeply.
Buying the Dip: An Example
Buying the dip is really about market timing, with two common strategies. The first involves adding support trend lines to the charts, and the second is using an oscillator, such as RSI, to help identify turning points.
Let’s start with trend lines. When the market is in a strong uptrend, look for common swing lows, and connect them with a trend line. Extend this trend line to the right, and it should be below the current market price.
Then, as a corrective dip unfolds, look to buy when the price reaches the support trend line, while targeting new highs. This process can be repeated — again and again — as the market frequently dips, even within a strong uptrend.
In the image above, a support trend line can be drawn for Bitcoin from January to April 2021. There were multiple occasions where Bitcoin’s price dipped to the trend line, offering an opportunity to buy.
The trend line won’t hold up forever. When it breaks, that’s a clue that a larger correction, and even a possible crash, may be unfolding.
Another common strategy for buying the dip involves waiting for oversold oscillators on the intraday chart. When Bitcoin is in a strong uptrend on the daily chart, scroll down to a 4-hour chart and add an oscillator, like the RSI.
The RSI indicator is versatile to help traders identify when an asset has become oversold. Its signals can alert you that the dip may be coming to an end, offering an opportunity to buy.
In the Bitcoin chart above, there are several instances when the RSI is signaling oversold conditions, meaning a rally is about to begin. A trader could use those signals to buy while targeting new highs.
The challenge with using a tool like RSI is that if Bitcoin were to crash, the oversold conditions would be a buy signal — even though the market is collapsing. Therefore, RSI works best when conditions are believed to be sustaining the uptrend.
Does Buying the Bitcoin Dip Work?
“Buying the dip” itself is just a catchphrase. Traders need to turn the phrase into a strategy that’s similar to what we’ve outlined above. Therefore, to successfully buy the dip, you need to use technical analysis to time the market. There are many other oscillators and indicators to use for this purpose.
Aside from the strategies discussed above, Bitcoin must be in a strong uptrend. The strength of the uptrend is what allows the price to recover from the brief dip. If the uptrend is lacking strength, then the strategy becomes riskier as the uptrend struggles to bail you out.
Worse yet, if Bitcoin is in a downtrend, then buying the dip won’t work because you’ll get caught in bull traps, leading to losing trades.
Should I Dollar-Cost Average Instead?
Dollar-cost averaging means buying a predetermined amount of an asset at predefined timing intervals. An example would be buying $500 of Bitcoin on the first Friday of each month.
The main difference between dollar-cost averaging (DCA) and buying the dip is that DCA is predefined, irrespective of the price of Bitcoin. On the other hand, buying the dip is fully dependent on the price of Bitcoin, and requires the trader to correctly time their entries into new bull rallies.
Therefore, when deciding whether to DCA or buy the dip, consider your skill levels in technical analysis and timing bullish reversals. DCA doesn’t require any special skills — just a calendar to plan your buys. Buying the dip, however, does require the trader to understand technical analysis and be able to implement it with high accuracy.
If you feel you need more practice on timing entries, then consider DCA, which is designed for newer traders.
Risks of Buying the Bitcoin Dip
There are several risks a trader faces when they decide to buy the Bitcoin dip.
Most of the risk is associated with analytical errors. There are certain market conditions in which buying the dip tends to be more successful. If the trader misdiagnoses market conditions, then they’re going to be more susceptible to losses.
Additionally, buying the dip requires a rules-based strategy so that the trader knows when to enter the position. If the trader doesn’t have rules underlying their strategy — or doesn’t follow their own rules — then the likelihood of loss looms larger.
Lastly, the volatility of crypto makes it difficult to determine if, for example, Bitcoin is simply going through a small dip, or if it’s the beginning of a larger crash in prices. If it’s the latter, then buying too early in the crash will expose the trader to a significantly large loss. Over the past decade, it hasn’t been unusual for Bitcoin to correct more than 75% of its price.
The Bottom Line
Buying the dip is a popular catchphrase used by investors who intend to hold on to dear life with their assets, and typically in a long run. By itself, buying the dip isn’t a strategy for making money, which is why traders will want to create their own rules for buying and selling on minor dips in pricing.
In other words, buying the dip can be a successful tactic if the trader considers current market conditions. Otherwise, they might get caught at the beginning of a market crash, which will create losses in their trading account. As with any other trading strategy, buying the dip is best attempted with both market awareness and experience in technical analysis in your toolbox.