Crypto investors have been making use of the term, ‘buying the dip’ since the recent price fall of Bitcoin.
El Salvador, the first country in the world to adopt Bitcoin as a legal tender was in the news for buying the dip. The Central American nation bought 410 BTC [roughly $14.8 million] according to a tweet by President Nayib Bukele.
Bitcoin’s price has dropped below $34, 000, which is a 6-month low. Averse risk-takers like President Bukele are however buying the dip even in this period.
In this post, we’ll learn what buying the dip really means for crypto investors.
What does it mean to buy the dip?
The term ‘buy the dip’ means purchasing an asset after it has dropped in price. It is the believe of investors that the new lower price represents a bargain.
The dip is only seen as a short term blip, and the asset, with time, is likely to bounce back and increase in value.
Why Investors buy the dip
1. Investors and traders see a price fall of an asset as an advantageous time to buy or add to an existing position. When they buy the dip, they’re buying at a lower price, hoping to profit if the market rebounds.
2. Some traders buy the dips if an asset drops within an otherwise long-term uptrend. They hope the uptrend will resume after the dip.
3. Some say they are buying the dip when the price drops in order to profit from some potential future price rise.
4. Some investors may buy the dip when they are averaging down. This is an investment strategy that involves purchasing additional shares after the price has dropped further, resulting in a lower net average price. In this case, if dip-buying does not later see an upturn, it is said to be adding to a loser.
Limitations to buying the dip
Buying the dip is not without limitations just like all trading strategies. This does not guarantee profits as an asset can drop for many reasons.
A temporary drop in price or a warning signal that prices are to go much lower is relatively unknown to investors. It is therefore not a guaranteed way to make profit with investment in crypto.
If averaging down doesn’t make huge return on investment as proposed, it is viewed as a recipe for disaster.
Although all trading strategies and investment methodologies have some form of risk control, investors should learn to cut their losses.
It is very important to have in mind that you should only invest what you can afford to lose when dealing with crypto assets. Its either you are handsomely rewarded or laid down by the psychological effect of a huge loss.
Also Read- My Crypto is Dipping? What Can I Do?