Prices of cryptocurrency fell by 20% within a day: Is this the dip that we’ve been waiting for? The fluctuation wiped out up to $365 billion in the crypto market, after Elon Musk’s tweet about the reversal of accepting Bitcoin as a payment option for Tesla’s cars.
However, the kings and queens of cryptos, Bitcoin and Ethereum, bounced back at 0.8% and 2% at the time of writing. Therefore, the crypto market still presents a bullish opportunity for investors, especially with rising concern about interest rates.
Are you wondering, “So, how do I leverage this market dip and gain the most out of it?” You’ve come to the right place. This article will provide everything you need to know about buying the crypto market dip.
What Is Buying The Dip?
Buying the dip is a trading strategy to long/buy an asset when the overall market trend is bullish, and sell when the market rebounds from its correction or consolidation. A dip is defined as a short-term, minor slide in asset price, and is also known as a pullback.
Based on the concept of price waves, the market will move in accordance with the overall trend and buying during intra-day correction, or intermittent consolidation will help investors reap profits when the market consolidates with the overall trend.
Although the cost of acquiring a position can be lowered from buying the dip, its risk/reward ratio should constantly be evaluated, as the dip may not be the most profitable when the market turns bearish.
That said, what are the essential steps to buying the dip? We’ll break it down for you in the next section.
Four Steps to Buying The Dip
As the crypto market takes a wild dip this week, are you ready to ride the next crypto gold rush? Here’s the kicker: There are only four simple steps to buying the dip.
Step 1: Spot the Underlying Trend
Since buying the dip is only profitable in a bullish setting, crypto investors must confirm the underlying trend and adjust their investment strategies accordingly.
Moving average convergence divergence (MACD) indicator lines can be used in finding the overall market direction. MACD is a momentum oscillator that is made up of two lines: a longer period moving average line, and a shorter period signal line. For instance, if a 26-period moving average line crosses the 9-period signal line, it signals a bullish trend is underway.
Step 2: Find the Market Dip
First, a price pullback in a bullish trend is a dip in prices that is way above the support line (in green). The red portion is where a trader can long for the crypto, while the green portion is where the crypto trader can close the position.
However, should the dip close into the line of support (in green), this would indicate an impending change in market direction — for instance, if the candlestick were to cut through the resistance line and go on a downward momentum as of April 19, 2021.
Step 3: Understand Why Dips Happen
Other tell-tale signs of a crypto dip include macro events, news and, of course, Tweets! If anyone’s words can move a million dollars, it has to be those contained in Elon Musk’s Tweets. Dubbed as a four-dimensional chess move by Yahoo!, Elon Musk is creating a series of tweets that downplays Bitcoin, causing a massive sell-off for the King of Crypto.
Bitcoin dominance fell from its grace by 20% from month-to-date. Hence, this is not a dip, but a correction.
A more plausible reason for dips in altcoins could be the political unrest around the world. Many factors can cause a dip, especially in length and strength. However, altcoins are growing as a viable option for an inflation hedge, due to their applications in decentralized finance (DeFi) and many other areas.
Step 4: Choosing an Exchange
Why is choosing an exchange important? To profit from buying the dip, the crypto trader must offer features such as setting limit orders and fast transaction settlements. Bybit offers creation of long positions for Bitcoin futures and processes 100,000 Transactions per second (TPS) is the number of transactions a blockchain network can process each second or the number o... matching machine.
This allows crypto traders to execute transactions at the right time to reap a profit.
Limitations of Buying The Dip
The disadvantage of buying the dip is that the asset price can drop further, and may not return to its peak. It can also be incredibly difficult to distinguish whether the dip is a persistent or a temporary drop. Hence, for beginners, it is essential to understand risk-control strategies from averaging out the cost to HODLing.
Conservative Strategy Averages the Risk of Buying The Dip
The dollar cost averaging strategy is to make regular investment at steady intervals, rather than dumping a lump sum. This will allow crypto investors to minimize loss during the bearish season and increase the wealth accumulated.
Alternatively, creating both long and short positions to bet or hedge against the market is also a viable option.
Another conservative strategy is to hold on to the crypto during the bearish market, and sell it when the market direction takes an uptick. As crypto is becoming the fifth-most circulated currency in the world, according to Quartz, the currency has proved its worth as a vessel in storing and transferring money. Therefore, HODLing crypto is akin to holding tech stocks in their early days.
The Bottom Line
Whether is buying the dip or ditching the dip, you first need to acquaint yourself with the fundamental and technical analysis of cryptocurrencies. Read on, as we discuss more about the essential techniques of crypto investment.