Buying the dip: Tips for investing in a bear market

Smaller investors are buying the dip as they rack up BTC at the fastest rate since 2017

A candlestick chart with the options to buy the dip or panic sell                                 
Setting a stop loss can ensure you don’t catch a falling knife when buying the dip – Photo: Shutterstock
                                

Contents

The bear market is not a favourable state for crypto bulls and enthusiasts with it currently taking a toll on the industry. But it does present the opportunity to buy the dip. With Bitcoin at its lowest point since 2020, could this be the right time to buy low and sell high?

Investors of all sizes appear to be buying the dip, according to lead on-chain analyst at Glassnode James Check. He tweeted: “Shrimp [investors who own less than 1 Bitcoin] are adding to the $BTC balance at the greatest rate since the 2017 ATH [all-time high].”

At its core, investors who are buying the dip are looking to acquire assets at a discounted price and make profits when the value soars again. But this is a risky strategy, especially with the volatile cryptocurrency market. There is always a chance that prices keep sinking. It is therefore essential to only buy with a plan that takes into consideration all the risks.

Plan of attack

Research is an investor’s best friend. Before buying any dip, whether it’s stocks or crypto, it is important to understand the context of the market and the reasons behind the recent fall in price.

Looking into whale movements, coin related news, and the wider economic market can provide an efficient backdrop for an informed trade. It is also necessary to understand the asset and the risks associated, whether its an industry giant like Bitcoin or an upcoming altcoin.

A common piece of crypto investing advice is to not trade out of FUD (fear, uncertainty, doubt) or FOMO (fear of missing out). Investors are recommended to stick to research and not purchase assets based on a gut feeling.

Avoid catching a falling knife

While a sharp dip can present an opportunity for investors to buy low, there is no guarantee it will stop falling. There is always a risk that the trader is caught buying Bitcoin mid-crash.

Investors often look for a double bottom or triple bottom before buying as this can demonstrate a key area of support for a cryptocurrency. Investopedia goes as far to describe a triple bottom as a “bullish chart pattern”, which could indicate a potential breakout.

But even support is not enough to warrant protection from a bear market. After the crypto market crash in May 2022, Bitcoin gained support at the $30,000 level. Yet, after the support, it saw another fall in June 2022 to the $20,000 mark.

Follow the trend

Buying cryptocurrencies as the price turns bullish is one method used to avoid catching a falling knife. Smaller investors especially will want to ride the market waves created by whales, in the hope that a profit is on the way.

Investors can use indicators and technical analysis to help them buy the bottom price just before the market sees an upswing.

Manage the risk

Risk assessment and risk management are essential to avoid falling into traps like this year’s double crash. Investors could avoid an overly aggressive strategy by using stop losses that automatically sell when a certain price is reached.

For example, if an investor bought the BTC dip at $30,000 and set a stop loss at $29,000, they would have avoided most of the second crash.

Another risk management tactic is dollar cost averaging (DCA), which is to invest incrementally as the price decreases. In turn, this will create an average position and avoids investors putting all their eggs in one basket. Investors who sold gradually during the recent price crashes would have been better off than those who put all their funds into buying BTC at $30,000.

A balancing act

Finding the best level to buy at is an art that is tough to master. The market could drop but not to the threshold you set for yourself. The volatile and quick moving nature of cryptocurrencies could then see investors, who strategically waited for the dip, miss out on large upswings.

Buying the dip, like any crypto investment, is a risky move. With the right risk management and attack plan, investors could minimise threats and maximise profits.

But profits in a bear market are far from guaranteed. Any crypto investor should be prepared to lose any investment down to the market’s unpredicatable status.

FAQs

What does buying the dip mean?

Investors who buy the dip are looking to purchase an asset at a discounted price and sell once its value rises. However, buying during a bear market presents challenges and investors should ensure they have a proper risk management strategy in place.

What does catching a falling knife mean?

There is always a risk when buying the dip that the price will continue to fall – hence the analogy about the inherent danger of trying to catch a falling knife. For example, after Bitcoin crashed to $30,000 in May 2022, but it then fell even further to $20,000 the following months. This makes it essential for investors to not buy more than they can afford to lose.

What is DCA?

To avoid catching a falling knife, investors can buy during a bear market in increments. This creates a more manageable, average position, rather than going all in at a specific price – this is known as dollar cost averaging (DCA). But like any crypto investment, there are still risks to DCA and investors should conduct thorough due diligence before investing.

Further reading

The material provided on this website is for information purposes only and should not be regarded as investment research or investment advice. Any opinion that may be provided on this page is a subjective point of view of the author and does not constitute a recommendation by Currency Com Bel LLC or its partners. We do not make any endorsements or warranty on the accuracy or completeness of the information that is provided on this page. By relying on the information on this page, you acknowledge that you are acting knowingly and independently and that you accept all the risks involved.
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