What Does it Mean to Buy the Dip?
Simply put, buying the dip is a conventional narrative used in the financial markets to describe accumulating assets during a short-term price decline. It doesn't necessarily happen during a bear market. A bear market refers to an extended period of declining prices, while a bull market refers to a period of rising prices. Typically, experienced investors buy during a price decline to sell and profit later when the price increases.
For example, someone could buy Bitcoin at the current $39,000 level hoping that the cryptocurrency will rebound after the bearish correction. Assuming the price of Bitcoin subsequently returns to the $60,000 level, the trader can sell and keep the difference as profit.
Buying the dip as the markets drop can be risky because it's hard to tell when the drop will stop. This is what traders refer to as "trying to catch falling knives." Some traders prefer to wait for the price of an asset to bottom out before buying the dip. Waiting for a consolidation (low-volatility period) gives them a better chance of buying at the local bottom before a reversal to the upside.
Buying the Dip in Cryptocurrency
Cryptocurrencies might be fundamentally different from stocks, but technical analysis can be as useful for cryptocurrency trading as they are for stocks. You might be tempted to buy the dip blindly when the price of a token starts dropping, but this might not be the right call. The dip can keep getting deeper, and you might end up losing your capital until the market rebounds.
Apart from the prevailing market sentiment, many other factors affect the price of a cryptocurrency. So, it is vital that you do your own research before taking risks. Below are some tips you can apply whenever you are tempted to buy the dip:
Look at the Bigger Picture
Before you dive into buying the dip, try to find out if the bull market is over and a bear market is on the way. As stated above, many professional traders only buy the dip when there is a price correction in an otherwise bullish market.
In the cryptocurrency market, bullish trends can be advantageous and can go on for months or even years. Bearish trends aren't any different. The first time Bitcoin almost reached the $20k mark was during the bull market of 2017, which ended in December. Shortly after, the cryptocurrency, and every other altcoin, started to fall until Bitcoin eventually bottomed out in the $3,200 levels.
What if an investor went long when the prices fell from $20k to $18, then again at $15k, lower and lower until the $3,200 level? The investor would have lost a significant amount of money and might have given up on cryptocurrencies before the bullish market resumed at the beginning of 2020. So, how do you know when the market is bullish long-term?
Study and Interpret Technical Charts on Your Own
You can see the bigger picture if you know how to interpret trading charts. Technical analysis refers to using the historical statistical trends of an asset to predict upcoming patterns. You can study some of the key technical indicators through Binance Academy’s article: 5 Essential Indicators Used in Technical Analysis.
There are many other technical tools you can use to predict the state of the market. What's more, you can combine your technical analysis with fundamental analysis for a more accurate prediction.
Understand the Fundamentals Behind the Trend
It's not always enough to interpret the technical data. You might also need to check out the intrinsic value of the cryptocurrency during the price drop or bull trend. Why is the price of cryptocurrency falling? Is it due to a flaw in the network? Did whale investors suddenly start selling off their assets? Is the price rising because a famous investment firm is shilling it? Fundamental analysis will help you make more informed decisions.
Use a Reliable Exchange
Where you buy and sell your tokens also matters. Binance, for example, offers helpful tips to traders that help them navigate the market with ease. It is the largest cryptocurrency exchange globally per market capitalization, and it offers advanced trading tools for beginners and expert traders. You can also opt for the Binance P2P, which allows users to trade cryptocurrencies directly with other community members. Below are some of the other benefits of Binance P2P:
There are no fees attached to buying and selling.
You can pay for tokens with your local currency.
Over 150 payment options available to traders.
The escrow service provides additional protection against fraud during transactions.
Responsive customer support attends to you promptly.
KYC verification is mandatory for all traders.
Closing Thoughts
The cryptocurrency market can be very volatile. So, it is crucial that you only invest with money that you can afford to lose. Always do your own research before making major trading decisions.
When you're buying the dip or applying any other cryptocurrency trading strategy, doing research will only mitigate the risks, not eliminate them. Technical and fundamental analysis can certainly help your cryptocurrency trading experience, but profits are never a guarantee. So, always proceed with caution.
Cryptocurrency investment is subject to high market risk. Binance is not responsible for any of your trading losses. The opinions and statements made above should not be considered financial advice.
