Now it is a bear market, and many people who still have cash on hand are eager to "buy on the dip".
However, is it a good strategy to bottom-fish or average down when the price falls? What are the related risks? This article will explain in detail the risks that may be encountered when buying on the dip for your reference.
Warning: Cryptocurrencies are high-risk investments. This article is for educational purposes only and does not constitute investment advice, nor does it suggest that you buy on the dip. Please understand the relevant risks yourself.
What is considered a "market decline" in the cryptocurrency market?
A market decline (or correction) refers to a significant drop in the price of a cryptocurrency from its recent high, but it does not necessarily mean entering a bear market phase.
In the cryptocurrency market, declines often have the following scenarios:
Price drops 5-20% from recent highs.
Short-term declines in bull markets tend to reverse quickly.
Declines in bear markets are usually slow and gradual, with occasional rebounds for a few days, but then falling below the previous low.
Declines are common in the cryptocurrency market, but declines in bull and bear markets are not the same, and the considerations when buying are also different.
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As for why the cryptocurrency market falls? There are several possible reasons:
Profit taking: In a bull market, after rising for a period of time, some people will definitely take profits, and there will be a temporary decline at this time.
Short-term events: Some events such as market FUD, government policy changes regarding cryptocurrencies, or macro events such as CPI, the collapse of US stocks, etc., may affect the cryptocurrency market.
Change in market sentiment: The cryptocurrency market is greatly affected by investor psychology, and this psychology can change rapidly. Sometimes a short-term sudden collapse may not even find a specific reason.
Technical indicators: The more people in the market observe technical indicators, when a certain technical indicator changes (such as falling below the moving average), it may trigger further selling by technical indicator investors, exacerbating the decline.
Of course, the above are just common reasons. There are many specific reasons for the decline, and sometimes it is difficult to find the real reason. Just know that the declining market is very complex and many factors can cause the decline.
What are the possible benefits of buying on the dip?
Different reasons for the decline will have different trading strategies.
Sometimes, "over-panic" in the market leads to an oversold situation, which may lead to a profitable opportunity to "buy on the dip". When the market realizes that it is over-panicked, the price often rises quickly.
However, the risk of this strategy is that sometimes you don't know where the line of "over-panic" is. The market may fall by 10%, and you think it's over-panic, but after buying, the market panics to a 50% drop.
A temporary decline may also lead to a rapid rise, which is also the buying reason for investors who buy on the dip.
Another possibility is that a project with good fundamentals may be brought down by the decline of the overall market (BTC), and this may be a good time to build a position.
Risks of the "Buy the Dip" strategy
1. Be careful when catching a falling knife.
There is a saying: "Don't catch a falling knife", which means that you must be very careful when buying on the dip, because what seems like a temporary decline may actually be the beginning of a bigger drop.
Because no one really knows how big the drop will be, you need to be aware of the risk when buying on the dip: it may continue to fall.
2. Misjudging the magnitude of the rise after the fall.
"Falling and then rising" is possible, but the magnitude may be misjudged when investing.
For example, the price of a project has fallen by 20% because its prospects have deteriorated, and you may think that it is already oversold at this time, so you buy it.
However, the currency value continued to fall to 50%, which is the real "oversold" situation, and then it started to rise.
However, the currency price may rise by 10% from the low point of -50%, and the reaction is over. In this case, although your judgment is correct (the price will rise after the fall), the timing of buying is still wrong, so you suffer a loss.
3. FOMO's emotional decision-making.
There may be a "large bargain hunting" FOMO emotion when the price falls, so you may accidentally build too large a position, and the position you buy exceeds the risk you can bear.
This is very dangerous! Because if it falls further, you may not be able to stand the loss and sell early, or you may sell early because you are afraid of turning a profit into a loss when it rises.
4. Opportunity cost.
Buying on the dip and waiting for the rise may be the correct judgment, but at the same time, other rising coins may still be reaching new highs.
At this time, instead of buying on the dip, it is better to chase the high, and the opportunity cost should also be taken into consideration; however, chasing the high and buying on the dip are different trading strategies, so it is better not to think about them together.
Investment schools that buy on the dip.
"Buying on the dip" is actually divided into the following two schools: bottom-fishing and bargain hunting.
The bottom-fishing school focuses on short-term entry and exit. After buying, the price must rise immediately in a short period of time, and profits must be taken immediately.
This often happens in a bull market, because in a bull market there will be temporary declines during the rise, and then continue to rise. The school that catches this turning point is the bottom-fishing school.
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Bargain hunting is to take advantage of market irrationality and panic to buy targets with good fundamentals, because these targets may be "wrongly killed", and now is a good opportunity to buy more coins at a cheaper price.
The bargain hunting school must correctly understand the fundamentals, because all investment decisions depend on the judgment of the fundamentals. This type of investment is also called "left-side investment" or "value investment", which is why many people say that value investors are not afraid of falling prices.
Conclusion: The mindset to have when buying on the dip.
The cryptocurrency market often falls, whether in a bull or bear market. Therefore, you must think clearly about the logic behind buying on the dip.
Is it worth buying more on the dip because the project is good?
Or is the market oversold, taking the opportunity to buy coins that were wrongly sold?
Or is the market panicked in a short period of time, taking the opportunity to bottom-fish and wait for the panic to pass?
Or is it simply that the technical indicators have reached the buy point?
Buying cryptocurrencies when the market is down can be profitable, but it is also a risky strategy. If you are wrong, you must decisively exit to avoid further losses.
Remember, no investment strategy is foolproof, especially in the cryptocurrency market!
In the highly volatile and uncertain cryptocurrency market, there are often many and complex reasons for the decline. Therefore, no matter what the strategy is, risk management should be the first consideration, and potential profits are secondary.
