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Ask CrytoVantage: Is it a Good Strategy to Buy “Dips”?

Occasionally when people hear about the volatility of bitcoin’s price, they are tempted to try to put the common investment saying “buy low, sell high” into practice. However, making short-term profits off of bitcoin is not as easy as it sounds. It is important to understand the risks involved before attempting to trade bitcoin.

A man analyzing stock market trends

What Does it Mean to “Buy Dips”?

Bitcoin’s price is known to be highly volatile, which means that the price varies drastically on short time intervals. This volatility increases the risks associated with buying bitcoin as an investment in general, but it also provides a potential opportunity to make large profits in a short amount of time.

By now, you have probably heard multiple stories of people “getting rich quick” by trading bitcoin. This typically happens when someone buys a large amount of bitcoin at a low price (a “dip”), and subsequently sells the bitcoin once the price has either rebounded or increased beyond a previous “high”. Buying while the price is low and selling when it is high is a well known trading strategy that is typically applied in all bull markets – not just bitcoin. This trading strategy can be used on different time intervals ranging from days to weeks.

This trading strategy requires some ability to predict the markets because you need to be able to estimate when the price is going to rise again. However, accurately predicting the markets is nearly impossible, and typically only professional traders are even mildly successful with this technique. For this reason, it is extremely important to understand the risks before attempting to trade bitcoin.

On the other hand you can simply buy dips and hold (HODL if you prefer) long-term to increase your likelihood of profit if time isn’t an issue.

Timing the Market is Difficult

Attempting to predict the price of bitcoin requires significant research into past trends and fluctuations. The price of bitcoin is highly volatile and is often impacted by world events such as large companies announcing their intentions to accept bitcoin as a form of payment, bad press, or regulatory changes. Understanding what moves bitcoin’s price is an important step in estimating whether the price of bitcoin is about to rise or fall. As you can imagine, this process is time consuming. Typically, successful bitcoin traders spend a long time analyzing and learning about these trends before starting to trade.

Bitcoin trading can also be time consuming because it requires the trader to constantly be paying attention to market fluctuations. The price of bitcoin can rise and fall in a matter of minutes. The trader must pay consistent attention to the price of bitcoin in order to know when it is the right time to buy or sell.

There is plenty of competition when it comes to trading bitcoin, which can make it even more difficult to be a successful bitcoin trader. Some professionals treat bitcoin trading as a full-time job, dedicating countless hours to watching every movement in the market. Others have developed bots that buy or sell bitcoin according to intelligent trading algorithms, often out-pacing and out-competing humans when it comes to short-term trades.

Managing Risk

Due to the volatility of bitcoin’s price, bitcoin should be considered a high risk investment. Whether you are planning to trade or hold, the most important thing to remember when investing in bitcoin is to only buy what you are willing to lose.

When it comes to buying “dips”, there is no way to be confident that the price will increase again. A common way that traders lose money is by selling their bitcoin in a panic when the price begins to fall. If you only buy what you are willing to lose, you will be less likely to “panic sell”. A typical rule of thumb to safe and successful investments is to remove emotions from your decisions, and this can only be done if you are not emotionally bound to the funds you are investing.

Finally, be wary of others who try to advise you on when is the best time to buy or sell. Professional traders who have large audiences on social media may be trying to influence the market. For example, if they are encouraging others to buy during a certain “dip”, you can assume they want to see the price go up to increase the size of their own investments. If you make the decision to trade bitcoin, you should act based on your own research and assumptions, and be prepared to take full responsibility for the outcomes.

Alternatives

The investment strategy you choose depends on your appetite for risk, as well as how long you want to invest in bitcoin. If after reading this article you believe bitcoin trading is too risky or involved for your liking, there are alternative approaches that require less time, and can help decrease risk. For example, dollar cost averaging is a technique that involves repeated, small investments into bitcoin on a consistent basis, regardless of the price of bitcoin. Over bitcoin’s history so far, this method has been proven to be successful for those who are willing to invest in bitcoin for the long term. For a more in-depth view of different investment strategies, take a look at What’s the Best Basic Strategy for Bitcoin Investing?

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CryptoVantage Author Billy Garrison

About the Author

Billy Garrison

Billy Garrison focuses his research and writing on Bitcoin and the Lightning Network. He is interested in the technical details that allow these technologies to survive and grow without the need for a central authority. Billy also loves helping people learn about Bitcoin which led him to start the Halifax Bitcoin Meetup.