May 15, 2018 in Community, Education

Should I buy the dip?

“Buy the dips” is a slang phrase referring to the practice of purchasing cryptocurrencies, stocks, commodities and other asset classes following a decline in price.

Market corrections are healthy and many investors look for corrections to add to their portfolios.

By the time inexperienced investors decide to buy cryptocurrency during a dip in price, chances are that they will have missed the opportunity. The current correction has been going on since the turn of the year. New investors will be getting frustrated and may perhaps even lose confidence in cryptocurrencies as a whole. “It’s a bubble, it’s a scam, the markets are overvalued, there is no use-case” are comments usually levelled at crypto enthusiasts. Of course, we don’t agree with these comments and see blockchain technology and cryptocurrency as having a strong use case moving forward.

So, when it comes to buying the dip, our approach is simple. Regardless of what market you are investing in i.e. cryptocurrencies, stocks, commodities etc, you first need to identify what is causing the dip. Has the dip occurred due to some bad news or rumours? Will it have a short or longer-term impact? Could it be that markets are correcting due to being overvalued or overbought? Do markets just need a rest and some consolidation? If we can answer these questions we can then determine the length of time a correction may take (this is just guesswork based on fundamentals and technical analysis).

Every financial market has highs and lows. Cryptocurrency due to its relatively low market cap usually see’s big swings in price whether on the way up or down. We see overreactions whether buying on the way up or selling on the way down. And with cryptocurrency in particular, the constant FUD (fear, uncertainty, depression) concerning regulation, taxation, corruption and crypto bubbles creates doubt in minds. Most long-term investors have been here before. The advice to new investors is to always do your own research and don’t follow the hype.

BTC has corrected 70% since its ATH at the end of December 2017

A good correction is usually somewhere between 30% to 40%. The current correction that we find ourselves in dropped even further providing incredible opportunities for investors to buy at very low prices. However, most new investors (and traders) generally let their emotions get the better of them and end up missing out. Ideally, as an investor, you would want to see signs of recovery before buying/accumulating a position. You don’t want to be buying a falling knife!! so we need to see some conviction in price to suggest the market is turning before buying.

To help you buy into a dip, one of the best strategies to employ is average costing. For example, rather than buying your entire intended position in one clean swoop, buy gradually in smaller increments at different price levels. This allows you to take advantage of prices should they fall lower. So, if we were investing $600 USD into OmiseGo for example, we would split the $600 USD into 3 equal positions giving us $200 USD per position. We would then invest each position i.e. $200 USD at different price levels with the hope of buying positions 2 and 3 at a lower price than position 1. This strategy is widely employed by investors and traders.

Experienced investors always look for corrections to add further cryptocurrency projects to their portfolios. In some cases, they may have missed an opportunity during the initial coin offering (ICO) and have been waiting for the price to dip relative to the ICO price. Projects that have shown progress have delivered on some of their targets and have received recognition and more publicity may prompt already invested investors to add to their position size for longer-term gains.

This is not financial advice. Please consult your financial adviser before investing. This article is for entertainment purposes only.

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