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Should you buy the dip in Bitcoin and other cryptocurrency prices?

Since the crypto market is still at a nascent stage, there is no long-term historical data to decipher its price movements

September 24, 2021 / 10:09 AM IST

The cryptocurrency market is witnessing a turbulent time in 2021. On the one hand, El Salvador has adopted Bitcoin as a legal tender, whereas the US SEC is planning to sue Coinbase Global,  a cryptocurrency exchange platform.

So, 2021 has been highly volatile so far for Bitcoin and other cryptos. Bitcoin was hovering around $28,000 in January and reached a peak of more than $63,000 in April. And since then, it has moved between $29000 and $48000 (currently). The recent price correction has again echoed those magical words “buy the dip.” Should you really should buy the dip?

Hope versus reality

The crypto market is volatile. Now, the underlying assumption or the hope to buy the dip, whether in the stock or crypto market, is that prices would ultimately rise. And you tend to make more returns by investing at a lower entry point for a possible upside in prices. But that does not always apply to all cryptos. Remember that stock or crypto prices often fall for all the wrong reasons.

Since the crypto market is still at a nascent stage, there is no long-term historical data to decipher its price movements, and we cannot tell with certainty how far the prices can go up after every correction. Though short-term data suggests that crypto prices have gone up after previous crashes, there is no guarantee that it will keep on happening, and that too for all the cryptocurrencies in circulation.

So, should you not buy the dip?

The assumption behind buying the dip is that you have sufficient cash/ surplus available. If you look at the stock market crash of the year 2008, a few investors bought and averaged out their investments when the BSE Sensex crashed to 15000 levels. It dipped more, and some brave heart souls again bought at 12000 levels. Do you know how many lucky souls were left to buy when it further crushed to less than 9000? Overall, by the end of 2008, the BSE Sensex had dropped after touching more than 20,000 to less than 9000.

I don’t suggest not buying the dip, but it is essential to be cautious. My advice: invest money you can afford to lose and avoid the trap of averaging or buying the dip because it is nothing but timing the market, which is futile.

Follow the 5 percent Rule

Keep your crypto investments under 5 percent of your overall net worth. If your crypto investments are below the 5 percent limit, you can buy on dips subject to available surplus. Remember that this 5 percent is not a standard rule but is designed to keep your hard-earned money safe from a highly volatile asset class. You can always increase your allocation on the basis of your risk profile. I suggest you don’t break this rule until we get the regulatory clarity on this and let the overall crypto market also mature with time.

Be a HODLer

HODL is an acronym for 'hold on for dear life' to encourage investors not to sell their crypto investments under panic and be genuine long-term investors. You don't want to become a long-term investor for the wrong reason, meaning when you invest in the crypto market to make quick money in the short term, and the market falls.  Make sure you don't become a long-term investor for this reason.

Create your crypto index, find the next bitcoin!

Similar to the stock market, where you have large-cap, mid-cap, small-cap, and penny stocks, the crypto market also has hundreds of tokens to choose from. Remember that not all cryptocurrencies are equal, and you need to stick to those with use cases and the projects you understand and believe in. You can create your crypto index, consisting of Bitcoins, Ethereum, Cardano, XRP, Binance coin, and more, but do not invest in any coin blindly, do your research well and stick to your risk profile.

Avoid FOMO

Last but not the least, you need to avoid FOMO. Do not think that crypto won't rise further, and you have to get into this immediately. It will help if you resist the fear of missing out and stick to the basics of your asset allocation.
Rishabh Parakh is a Chartered Accountant and a founder of Money Plant Consultancy
first published: Sep 24, 2021 10:09 am