Buying the dip? Things to watch out for.
Meet Stacey, a student who has been waiting for the right time to invest in crypto. After extensive research, Stacey identifies a few coins that she intends to purchase and hodl.
However, the crypto market suffers a heavy dip and many investors — including her best friend — incur massive losses. Instead of getting discouraged, Stacey is left in a dilemma on whether to keep her capital or invest in the dip.
Stacey is not alone as many investors face this dilemma every day.
Are you contemplating whether to buy or not after a significant price drop? If this sounds like your situation, then today’s newsletter is for you. Read along!
What’s a dip?
A crypto dip refers to a drop in the value of an asset. For example, the price of Bitcoin has dipped from $40,000 at the beginning of the year to its current value of $30,000. A significant dip is usually followed by a bearish market (This is when the crypto market continually loses value).
What causes a dip?
There are a few factors that cause the crypto market to dip.
Firstly, the crypto market is volatile due to speculation from investors and traders who bet on which assets will increase or decrease in value. Therefore, when a particular cryptocurrency is in the spotlight for the wrong reasons, investors tend to shy away from it leading to a price drop.
A great example is the story of Luna, a crypto asset that was designed to ensure that UST — a stablecoin — is pegged to the dollar. Luna became embroiled in a controversy which led to serious FUD — fear, uncertainty and doubt — among investors. It lost 90% of its value in the space of a few days because investors started to sell off their holdings.
You can learn more about what happened to Luna and UST in our previous newsletter.
Another factor is regulation and government policies. Crypto continues to divide opinions and while some countries like the Central African Republic have adopted crypto, other countries have tried to ban crypto in their regions.
These negative regulatory activities can lead to a dip in the market. The Chinese government’s ban on bitcoin mining in 2021 is a great example of this. Following the 2021 ban, the value of Bitcoin suffered a significant dip.
Lastly, the crypto market is filled with scam projects seeking to defraud unsuspecting investors. Scam activities such as pump and dump, rug pulls, and pig butchering schemes can lead to a major dip for the coin involved.
Here’s a quick guide on 6 crypto scams that can make you lose money
Other factors that may lead to crypto dips include wars, negative news, fear and lack of community support for the asset.
Things to look out for during a dip
Now that you understand what causes a dip, let’s explore some things to look out for before buying the dip.
- What caused the dip?
This is the first question to ask yourself before buying the dip. You need to understand why the market fell off and what could be the reasons for the dip. To get this information, you’ll need to read, watch and listen to experts analyzing the dip.
Breach provides a great medium to learn about trends in the crypto market. You can read our analysis of the current market dip.
You should also take note of what happened in previous market dips. This provides historical information on the behaviour of certain coins during dips. With this information, you’ll be able to understand the market better and be well-positioned since no one can really predict anything in life.
- What are the most affected coins?
Many coins lose their value when a market dip occurs. However, some coins get totally lost and their hope of recovering is nearly impossible. As a potential investor, you should be able to separate the most affected coins from the least affected.
One way to go about this is using coin data aggregators like Coinmarketcap and Coingecko. These platforms help you compile important information about different coins. Some of this information includes:
- Token supply — The number of coins or tokens that currently exist and are either in circulation or locked somewhere.
- Tokens in circulation — The total number of coins or tokens that are actively available for trade and are available to the general public.
- Price movement chart — A chart displaying the price fluctuations of a token over a period of time.
- Social media score — A sum of the engagement metrics of a token according to users on social media outlets.
With this knowledge, you can categorize potential coins based on their performances in the crashing market.
Deciding on crypto coins to invest in
You should note that what makes a cryptocurrency strong is the hype behind it and its community. Therefore, a digital asset like bitcoin is obviously the safest cryptocurrency to buy during a dip for the following reasons:
- It is the first cryptocurrency and has survived several market dips.
- It has a large community actively promoting its adoption.
- It is a globally recognised means of payment used by many businesses and organizations.
- It has a large number of holders who hold the token in their wallets.
- There are a lot of developments and new products springing up in its blockchain.
Any cryptocurrency that has most of the qualities listed above could be a potentially safe choice to invest in during the dip.
Are you an active or passive investor?
When you buy the dip, you face the choice of being an active or passive investor. An active investor buys with the intention to sell when the price of the cryptocurrency picks up, while a passive investor buys and holds for an extended period with the hope that the value increases over time.
Whether you’re an active or passive investor, you should have a clear plan on how you want to achieve your cryptocurrency goals.
Benefits of buying during a dip
Here’s a clear picture of what it means to buy the dip.
During Black Friday sales, companies offer discounts to customers for certain items. Imagine getting a 50% discount on a mobile phone worth $1000. This means that you’ll be paying $500 for a phone with a market value of $1000. You can then decide to sell the phone in the future for its full market value or close to its initial value and turn a profit.
Similarly, buying the dip in crypto means that you do not have to spend so much investing in crypto because the prices are already down. Therefore, the crypto market offers you a discount to buy and invest in tokens.
Additionally, buying the dip provides an ideal way for beginners to enter the crypto market as the potential for making losses is greatly reduced.
However, there are challenges with buying the dip
- Buying the dip requires great timing in the crypto market. For example, there are cases where the market dips beyond expected levels. Let’s say the price of bitcoin dips to $20,000 and you decide to buy since you consider this an ideal price. If it drops below this price you’d be at a loss. Therefore, it’s a balancing act of effectively timing the market.
- Buying new tokens can be risky during the dip because they’re mostly backed by hype and enthusiasm. Eventually, the excitement dies and the coin could suddenly lose market relevance. As such, you have to be careful with the coins you decide to invest in.
Buying the dip is an investment strategy that relies on predicting future price movement. If you can time the market — buying crypto at a low price just before they gain value — you can earn a tidy profit.
Nevertheless, please note that this is not financial advice and the crypto market can be very volatile so do your research before buying the dip.
Also, if you are caught in the dip and contemplating whether to sell or hodl, we have an interesting article that will help you through the dilemma.
We hope you learned something useful from today’s newsletter about what to look out for when buying the dip. The next time someone has questions about the crypto dip, send them a copy of this article and let them be amazed by your knowledge.
Finally, don’t forget to join the Breach community to learn more about crypto and its uses. Remember that learning is better with crypto-curious friends.