Table Of Contents
- What Is A Dip?
- Why Do Cryptocurrencies Dip?
- What Happens When Cryptocurrencies Dip?
- 1. Ensure That Your Coins Aren’t Affected By A Security Breach
- 2. Ensure That Your Coins Aren’t Affected By A Hack
- 3. Don’t Panic And Sell Your Coins When Prices Drop
- 4. Understand Why Prices Are Dropping Before Making Any Decision
- 5. Reassess The Long-term Outlook For Cryptocurrencies That You Own
- 6. Wait For Price To Bounce Back Before Selling Your Coins
- 7. Use Stop Loss Orders To Sell Your Coins At Guaranteed Prices
- Buying The Dip Strategy
- Selling The Dip Strategy
- What To Do During A Long-Term Downtrend?
- Risks When Buying The Dip
What Is A Dip?
A dip in cryptocurrency is a significant drop in the price of a single or group of cryptocurrencies. It’s basically a sudden fall in the value of cryptocurrency.
“Buy the dip” is a term you use when it comes to dips and investment. It’s about buying the cryptocurrency at its cheapest and selling it when its value has increased. Of course, it doesn’t always happen like this: crypto price decreases can be very random and unexpected. That’s why you need to know about dips in cryptocurrency before planning any investment.
Why Do Cryptocurrencies Dip?
There are several reasons why cryptocurrencies can dip:
- A major security breach occurs resulting in hackers stealing a large number of coins from an electronic wallet.
- Hackers manage to hack an exchange resulting in the loss of hundreds or thousands of cryptocurrency coins.
- Countries implement stricter regulations towards cryptocurrencies, reducing demand and dropping prices.
- New digital currencies are introduced into the market, drawing investors away from already existing ones
- Influential personalities within the cryptocurrency industry express their negative opinions about specific cryptocurrency coins.
- News about government taxation and restriction on the use of digital currencies.
- Investors may feel that cryptocurrencies are overpriced and sell off their coins, resulting in a drop in prices.
What Happens When Cryptocurrencies Dip?
When cryptocurrency prices experience a dip it can be difficult for investors to make rational decisions because every crypto-coin is different. Some coins lose value rapidly while others remain intact even if the market goes into a dip. This is why it’s important to understand what cryptocurrencies are before investing in them.
The following are some of the things that you should do when your coins go through a downward trend:
1. Ensure That Your Coins Aren’t Affected By A Security Breach
Major security breaches like those experienced by Coincheck and BitGrail can greatly affect the value of your coins. Hackers often raid cryptocurrency exchanges’ electronic wallets with the aim of stealing a large number of coins at a go. This creates a high level of uncertainty in the market, reducing demand and consequently dropping prices. Ensure that your cryptocurrencies aren’t affected by such security breaches by storing them in a secure wallet.
2. Ensure That Your Coins Aren’t Affected By A Hack
It’s not uncommon for hackers to launch cyber attacks on cryptocurrency exchanges where billions of dollars are traded every day. These attacks result in the loss of hundreds if not thousands of coins belonging to various traders, resulting in prices dropping significantly.
The price drops even further if the coins hacked are held in high regard, like Bitcoin, Ethereum, Cardano e.t.c. Make sure that your coins aren’t affected by such attacks by choosing an exchange with a good reputation and ensuring it doesn’t store all of its coins on one wallet or platform.
3. Don’t Panic And Sell Your Coins When Prices Drop
We all know how difficult it is not to panic when your coins start dipping. But if you sell them as soon as they drop, chances are that you’ll make a huge loss because the market may bounce back to its previous price levels or even increase shortly after, leaving you with nothing.
The best thing to do when prices drop is to wait patiently until they start picking up before selling them off. This will also give you the time to assess the cause of the price drop and make adequate plans…
4. Understand Why Prices Are Dropping Before Making Any Decision
Before deciding on what action to take, it’s important that you understand why the prices of your coins dropped. This will help you in deciding whether to buy coins at a lower price or wait it out for prices to rise again. If the cause of the drop is temporary, then there’s no reason for panic because coins often bounce back when such issues are resolved.
For example, Bitcoin’s price dipped in February 2018 due to issues with changes to cryptocurrency regulations in South Korea. However, its price has since returned back to the levels preceding the drop once investors became aware that this was a temporary issue and decided not to panic sell their holdings. On the other hand, if the cause of the price drop is permanent (e.g., security breaches), it’s best to cash out before prices drop further.
5. Reassess The Long-term Outlook For Cryptocurrencies That You Own
If you own cryptocurrencies for the long term, then you shouldn’t panic when they show signs of a downward trend for a few weeks or months. However, if you plan on trading them in the short term, you should understand that prices aren’t likely to return back to their previous levels anytime soon. Short-term investors are advised to cash out before things get worse.
After assessing your coins’ current situation, you can now take the appropriate action. If the cause of the price drop is temporary, then it’s best to hold onto your coins until prices start picking up again. If the cause of the price drop is permanent, then you should cash out before things get worse and look for alternative coins that have a long-term potential for growth.
Finally, if you’re planning to trade your coins, then it’s important to pay close attention to volumes traded on exchanges as well as the order books. These can help you establish whether it’s a good time to buy or sell your coins.
6. Wait For Price To Bounce Back Before Selling Your Coins
If you’re planning to trade your cryptocurrencies, then it’s best to wait for the price to bounce back before selling them off because selling at a loss would negatively affect your trading record and your reputation as a trader. However, if you’re not trading and simply investing for the long term, then it might be better to sell them at this point before prices drop any further.
7. Use Stop Loss Orders To Sell Your Coins At Guaranteed Prices
If you want to be absolutely certain about selling your coins while still doing so at a decent price, then you can use stop-loss orders. In this way, if the prices drop as much as you anticipated, your order will automatically be executed by the exchange. This way, you don’t have to worry about executing your stop-loss order at the right time and still stand a chance of making profits by buying coins for lower prices when their price starts picking up again.
Buying The Dip Strategy
This is the strategy you should follow if you own cryptocurrencies that have gone into a dip. It’s basically about buying more of the same cryptocurrency you already have at its cheapest price. This works because it always takes time for prices to go back up and by then, your investment will be worth even more than before the dip happened.
You’re not just buying more of the same cryptocurrency, you’re also reducing your average cost which is an important aspect of investing.
Selling The Dip Strategy
This strategy works especially well if you own cryptocurrencies that are new to the market or coins that saw their prices increase significantly in a short period of time. It’s about selling the cryptocurrency you bought at its highest possible value and then buying it back later when its price has decreased. This strategy is simple but very risky because cryptocurrencies are volatile by nature, so it’s difficult to determine if their prices will rise or fall after investing in them.
What To Do During A Long-Term Downtrend?
If you own cryptocurrency that has been in a long-term downtrend it’s recommended to either hold onto them or try selling them at their highest possible prices. Don’t panic sell because this could result in you losing money instead of making it.
Risks When Buying The Dip
As much as buying the dip is a sure way of making money in cryptocurrency, it’s not without risks. Here we look at 5 risks you should consider before implementing this strategy:
1. The Price Could Keep Dropping
Even though you bought when prices were low, they might drop even lower than that and then never go back up again. This is unlikely, but it could happen if the cryptocurrencies you’re investing in are not close to mass adoption and their development teams don’t have any concrete plans for them yet.
2. You Could Lose Money During A Dip
Buying during a dip might seem like a good idea but you could still lose money doing it. This is especially true if you bought at the same price that’s even lower than what it was before the dip started. If this happens, then you’ve effectively lost money while waiting for prices to go back up again.
3. The Market May Be Manipulated
Due to the fact that cryptocurrency prices are driven by sentiments and expectations, they’re very manipulatable. This means that certain people can take advantage of buying at dips to make profits while pushing the price back up again and sell later for a higher profit margin. It’s hard to tell when this is happening or who exactly trades like this, but it does happen all the time which is why it’s a risk you should keep in mind while thinking about buying the dip.
4. The General Market Might Be Unstable
Even though you bought the dip in one particular cryptocurrency, its price might still drop because of problems happening in the general market. For example, let’s say there is a large-scale selloff across all cryptocurrencies which could result in the prices dropping significantly across the board regardless of your cryptocurrency’s price trend.
5. The Market Might Experience Another Downtrend
Even though you bought the dip in one cryptocurrency, this could still cause it to experience another downtrend. This is especially true if the price trend that led into your buy-low strategy has just reversed itself and will continue going down even lower. The point here being that there are never any guarantees when it comes to cryptocurrency markets and you should never base a long-term investment decision on what happened over the course of 1 or 2 days.