Buying the Dip

If you’ve been following cryptoassets like Bitcoin or other altcoins for long, you’ve probably heard the phrase “buy the dip”, but may not know exactly what this means.  You might assume it means “buy when the price goes down”, and for the most part you’d be right, but depending on your personal cryptoasset strategy, what “the dip” is and what is meant when someone says “buy the dip” can actually have a few very different meanings.

Strategy: Accumulation and HODL

If your cryptoasset strategy is simply to “HODL“, or “hold”, you’re likely an accumulator. Your goal is to accumulate as much of the cryptoasset as you can, and hold onto it for the long term, or “go long”. Your exit horizon (if you even have one) is measured in decades or years, not months, weeks, or days. You may have a consistent influx of some amount of some other currency that you are converting into the cryptoasset at regular intervals, like a portion of a paycheck or regular dividend from some other investment. If this strategy sounds like you, your goal when “buying the dip” is to maximize value by buying when the exchange rate is relatively low for this regular interval.

For example, let’s say you are taking $100 from your monthly paycheck, every month, and converting it into Bitcoin.  The easy and emotionless way to accomplish this is to simply buy the bitcoin as soon as the funds are available, regardless of market price, and you wouldn’t be wrong.  This is a perfectly acceptable practice for this type of strategy.  If however you want to try to optimize a bit and “buy the dip”, you would look at the one month chart and see what the current market price is relative to the past month of market activity.  If the market is down overall, you’re already buying the dip. If the market is up, you might want to delay your purchase for a few days to a week to see if the market “dips”, or temporarily goes down a little from its current position. Perhaps you’ve noticed that the Bitcoin market tends to dip every Sunday night to Monday morning as the world markets come online for the week. Perhaps there’s some news that just came across the wire that you feel might depress the market a little. Watching and waiting for a dip to buy in during might be the right move.

The risk here however is that the market may just continue to go up, and there was no opportunity to “buy the dip”. If this is your strategy and you’re watching for dips to buy in on, set yourself some limits; If the market only goes up, how far up are you willing to watch it go before you stop waiting for a dip and you go ahead and buy in? If the market is going down, you can accomplish such a limit with a stop-loss order. Let the order follow the market down and then it will execute automatically when the market finally reverses.

Strategy: Accumulation Cost-Averaging

If you’re cryptoasset strategy is to accumulate the cryptoasset but always bring the overall cost of your holdings down, this is called “lowered cost averaging”.  The way this works is by buying additional units of the asset at a lower price than what your existing holdings, on average, have cost you.  Your goal is to accumulate as much of the cryptoasset as you can, and hold onto it for the long term. Your exit horizon (if you even have one) is measured in decades or years, not months, weeks, or days.  You occasionally have an additional amount of some other currency that you are converting into the cryptoasset, but it may not necessarily be at regular intervals. If this strategy sounds like you, your goal when “buying the dip” is to maximize value by buying when the exchange rate is below your current cost average for the asset, so that your new average is lower than the previous average.

For example, let’s say you receive your annual income tax return from Uncle Sam or receive a payout from your eccentric uncle’s estate who recently died in a freak jaguar-cuddling accident.  Suddenly you have some amount of fiat currency and want to convert it into Bitcoin.  In order to successfully lower your cost-average for your existing bitcoin holdings, you need to purchase the new bitcoin below your current holdings’ average cost, or when the market “dips” below this price.

The risk here is that if the market is quite a bit higher than your current holdings’ cost-average, the market may not dip below this price anytime soon (or ever!) and you’re stuck in a holding pattern with your quote currency in hand.  As with the previous strategy, you should set yourself some limits here.  How long are you willing to hold the quote currency while waiting for the market to come down before you go ahead and just buy at the market rate?  Fortunately, if you do end up purchasing at a rate higher than your current holdings’ average cost, the average will go up a bit and make it that much easier for the market to go below it again for your next purchase.

Strategy: Spread Trading

If your cryptoasset strategy is to actively trade an asset (base asset) and use the trading activity to accumulate more of a different asset (quote asset), then your goal at its most basic is to “buy low and sell high”.  The delta between where you bought some quantity of the base asset and sold that same quantity (less trading fees) is your profit in the quote asset.  Thus, “buying the dip” for this strategy, depending on your desired frequency of trades, could literally mean buying every single time the market is going down, and selling every single time the market goes back up.  There are as many strategies for how to accomplish successful spread trading as there are people, because every trading strategy should be tailored for the person implementing the strategy and the market the strategy is operating in, and discussion of specific trading strategies is outside the scope of this article.

As a quick example, in a sideways BTC/USD market where the exchange rate fluctuates around in a fairly narrow horizontal band, I employ a Blockhenge automated spread trading strategy called “Sliding Window Strategy” (SWS).  The SWS is dead simple; it just spreads my trading budget out in a set of orders over a pre-defined window (which occasionally slides to chase the market), and as the market exchange rate bounces around within this window, it buys toward the lower end of the window and sells toward the higher end.  It works quite well as long as the market maintains an otherwise horizontal trajectory, and the strategy is essentially buying every single dip.

The risk here is that when spread trading, if you’re trading on every single gyration of the market like the described SWS above does, there might not be enough delta between your buys and sells of your base asset to cover your trading fees and book any profit in your quote asset.  The Blockhenge SWS ensures that each buy and sell pair are a specific distance apart in the order book so that this doesn’t happen, but if you’re trading by hand this could be a risk.

Conclusion

The common wisdom around employing a trading strategy for any asset is that no two people’s trading strategy should ever be the same.  The strategy must be fine-tuned to take into account the individual person’s limits and goals, the properties of the market they are trading in, current local, regional, and global news events, and many other factors.  Similarly, a market “dip” can be defined many different ways when taking all these factors into account.  So when someone on Twitter says “buy the dip!”, keep in mind that a dip for you may not be the same as a dip for them.  It’s best to ignore the noise and focus on your own trading strategy.  Happy trading!

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The information contained on this website and the resources available for download through this website is not intended as, and shall not be understood or construed as, financial advice.  I am not an attorney, accountant, or financial advisor, nor am I holding myself out to be, and the information contained on this website is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation.

We have done our best to ensure that the information provided on this website and the resources available for download are accurate and provide valuable information.  Regardless of anything to the contrary, nothing available on or through this website should be understood as a recommendation that you should not consult with a financial professional to address your particular information.  Dustin D. Trammell expressly recommends that you seek advice from a financial professional.

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