Crypto: Should You Buy the Dip in 2022?
The cryptocurrency market has been experiencing a general downward trend in recent months. From April to May 2022, Bitcoin’s value dropped by 31%, while the price of Ethereum and Ripple fell by 37% and 48% respectively. This has alarmed some but left others wondering whether now is the time to buy the dip.
The collapse of Luna, the token that forms the basis for algorithmic stablecoin UST, has contributed to FUD that has spread across crypto markets in recent days. UST lost its peg to the US dollar at the beginning of May and its market value now stands at $7.7 billion, down from $18.4 billion before its decoupling. This has led to LUNA losing 95% of its value in just five days causing many traders to panic sell not just LUNA and UST, but other tokens that they worry could get caught in the crossfire.
At the time of writing, Bitcoin is trading at $27,724. A far cry from the heady days of late 2021 when Bitcoin reached an all-time high of nearly $68,000. This isn’t the first time we’ve seen a dramatic Bitcoin price drop, though, and despite the doubters, this could actually present the perfect investment opportunity.
Why is the crypto market down?
The fall in cryptocurrency prices over the past year is broadly believed to be the result of a range of macro factors that are impacting not just crypto, but weighing upon various global markets from tech stocks to commodities.
Rising inflation has led the US Federal Reserve to raise interest rates, and these inflationary controls often have a negative impact on cryptocurrencies like Bitcoin. As the cost of borrowing becomes more expensive, investors move away from ‘riskier’ assets and shift their portfolios to more conservative options, leading to the Bitcoin dip we’ve seen recently.
Other contributing factors influencing the crypto dip include Russia’s war in Ukraine and China’s ban on crypto trading and mining. It’s thought that between 65% and 75% of the world’s bitcoin mining was done in China, and without this, it’s uncertain how worldwide Bitcoin production (and by extension its price) will be affected.
However, a recent announcement by the Federal Reserve chairman stating he wasn’t considering further rate hikes caused Bitcoin’s value to rise by 6%, demonstrating just how quickly Bitcoin can recover when the conditions are right.
Also, cryptocurrency ownership continues to grow, and many think mass adoption is inevitable, leading to more confidence in cryptocurrencies. Despite Bitcoin’s volatility, the price has risen steadily over the years, and some predict it will hit $100,000 by the end of the year.
What does buy the dip mean?
Buying the dip means just that, buying when the price of an asset – such as a stock or a cryptocurrency – has dipped significantly. The idea is that you’re picking up a bargain, and when, or if, the price bounces back, you’ll make a profit. This buying low and selling high is the oldest of investment strategies, and to succeed, timing is key.
In the crypto market, investors will often keep a close eye on a particular cryptocurrency to see if it drops in value, buying when it does. Others will start investing small amounts once the fall hits a set threshold (say 20%) and continue investing each month until the price is up again.
Advantages of buying the dip
It’s not enough to buy a cryptocurrency just because it’s experiencing a dip. You also need to consider whether it’s a well-performing asset that will eventually rebound in price. Cryptocurrencies like Bitcoin and Ethereum have often outperformed expectations and, despite dramatic drops in price, have often later experienced huge rallies.
If you’re considering going down the buy the dip route, there are two main strategies available.
The first is HODLing, where you hold on to your crypto investment for the long term. Buying the dip is ideal for this kind of strategy – you buy in a bear market and then, ideally, sell later in a bull market for a decent profit. If an asset, like Bitcoin or Ripple, is trading below what many believe to be its intrinsic value, it’s a good time to buy and HODL.
The second is dollar-cost averaging, which is frequently used by stock market investors but also has applications in the crypto market. It involves investing a small amount into crypto at regular intervals. The idea is that you’ll be buying the dip at some point without having to worry about trying to time the market (something that’s hard to get right).
The current Bitcoin dip could be the moment for those investors who’ve been waiting for the right time to enter the market. Don’t rush into it though. Do your own analysis and research before deciding to buy and at what price.
The cryptocurrency market is volatile so no one can ever tell you when it’s the absolute right time to buy. However, if you’re buying when the market is low you’re increasing the chances that you’ll make a decent profit somewhere down the line, as long as you hold your nerve.
For a buy the dip strategy to be successful, patience and a cool head are key. Buying is only half the battle. You’ve got to know when to sell too in order to enjoy the biggest advantage of buying the dip – increased returns.
Disadvantages of buying the dip
There are, of course, no guarantees when investing, whether it’s in cryptocurrency or the traditional stock market. If anyone tells you that you can make big profits for little to no risk, they’re probably just another Bernie Madoff.
The biggest danger when buying the dip is that the cryptocurrency you’ve invested in doesn’t recover its price as expected, or that it takes so long to increase again that you end up stuck with your investment for fear of selling at a loss.
One particular mistake investors make is assuming that just because the price rose before, it will again. It’s also worth asking yourself if the crypto dip is actually justified. Not all cryptocurrencies are the same, and not all have the backing and investment that, say, Bitcoin and Ethereum enjoy.
Also, when there’s a crypto price drop it’s hard to know if that’s as low as it’s likely to go or if it’s going to drop much lower. This is where market knowledge comes in handy. Is the drop just a blip or are there fundamental reasons for the fall in value?
Because of the unpredictability of the cryptocurrency market, it’s difficult to know if and when the price will rise. Crypto investments can be risky and the best way to minimise that risk is to diversify your portfolio. As a general rule, many experts believe you should invest no more than 5% of your wealth into cryptocurrency, so keep this in mind if you do decide to buy the dip.
Is it time to buy the crypto dip?
Bitcoin and other cryptocurrencies have been through this boom-bust cycle before. Most recently in May 2021, when the crypto market lost $1 trillion of its value in one week before rebounding by the end of the year. It’s likely that the market will recover this time too, but the question is when, and also by how much? Even the experts don’t agree on the answers.
With the crypto market down, there will inevitably be those who cut and run and those who see a golden opportunity. If you’re prepared to be in it for the long run, then a buy the dip strategy in 2022 could be a good investment option.
As always, this article does not constitute financial advice and you should be sure to do your own research and consult a professional financial advisor before making any investment decision.
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