Market Corrections: ‘Buying the Dip’

In a previous post, I talked about dollar-cost averaging (DCA) – an investment strategy which is simple to setup and should reduce the impact of Bitcoin’s volatile price on your average purchase price. There’s another piece of the puzzle I want to discuss though: ‘buying the dip’. In this post, I delve into why you 100% should buy the dip, why most people don’t or can’t, and how to set yourself up to take advantage of opportunities.

Remember: I’m not a financial advisor and this isn’t investment advice. Check out my full disclaimer here.

Blood on the streets

Maybe your Friday morning looks something like this. You’ve rolled out of bed at an ungodly time, somehow found yourself showered, dressed, and sipping your morning coffee downstairs. You then make the mistake of opening your cryptocurrency tracker to be greeted by something like this.

The sweet taste of blood on the streets. Captured on 02/02/2018

At the time of writing on the 2nd Feb 2018, we’ve had a month-to-month fall of about $200bn in overall market capitalisation to about $420bn. From the peak in overall market capitalisation on 8th Jan 2018 of $830bn, we’re nearly 50% down. We might still have further to go down.

Panic and its cause

When something like this is happening, take a step back and look at your response. What is running through your mind? Are you in a panic? Do you want to sell all your crypto and just cut your losses? Why do you feel the need to do that?

If you’re responding with panic and are inclined to sell, then this is probably a symptom of either:

  1. Being overexposed (i.e., you’ve invested too damn much).
  2. You don’t understand how revolutionary cryptocurrency is (i.e., you’ve not educated yourself fully).

An oft-mentioned piece of advice parroted across the community is to only invest what you can afford to lose. If you’ve ignored this golden nugget, then you’re going to be more emotionally involved in the roller-coaster of cryptocurrency market movements. This is exactly what we do not want, as it makes it harder to think rationally.

Cryptocurrency is truly the deepest rabbit hole I’ve ever fallen down. Along the way, there are twists, turns, and traps. There is just so much to know and understand. And while it’s nice to internalise that additional knowledge, it isn’t necessary to appreciate how revolutionary cryptocurrency is. With a bit of curiosity and half a weekend, it’s reasonable to understand the essence of what cryptocurrency is all about. There are lots of resources aimed at beginners, some of which you can find in the /r/Bitcoin FAQ. I frequently recommend the ‘Bitcoin for Beginners’ playlist by Andreas Antonopoulos. If you’re like most, digesting the basics should leave you really excited about what cryptocurrency could do for the world.

What is ‘buying the dip’?

As long as you’re not already overexposed and have a grasp of what cryptocurrency is really about, then 50% corrections probably won’t bother you too much. In fact, you’ll be eager to buy more Bitcoin, or whatever other cryptocurrency, as the price is going down. This is the essence of ‘buying the dip’. It seems like common sense: who in their right mind would buy at an all-time high (ATH), but cash-out during a market correction?

The advantage of ‘buying the dip’ is that it lowers the average purchase price of the cryptocurrencies which you can’t get enough of. Essentially, you’re just doubling-down on a project which you understand well and believe has solid fundamentals.

How do you ‘buy the dip’?

Part 1

If you’re investing less than £5000 every month, then Revolut is the cheapest and easiest way to get funds onto an exchange like GDAX or Bitstamp. If you haven’t already, check out this guide on how to cheaply buy Bitcoin in the UK (which explains the Revolut method in the full). I’ll assume you’re buying the dip using Revolut and GDAX for the rest of this section.

Before you can take advantage of market corrections, you need funds set aside for that explicit purpose. You can add to this pile of funds in lump sums or by trickling money into it every month. I mainly do the latter and automate the deposit into my Revolut account with a standing order from my bank.

When you have a decent pot of funds, you have two options:

  1. Leave the funds in your Revolut account.
  2. Leave the funds on an exchange.

Option #1 means that you only transfer funds to an exchange once a market correction has occurred. This is your safest option. However, moving funds to GDAX will take at least 1 working day (because it’s a SEPA transfer). If the market moves back up during that time, you might miss out.

Option #2 means that you transfer the funds to GDAX ahead of any market correction. The advantage of having the funds on the exchange ahead of time is that you can immediately pull the trigger on a purchase. You’ll also be able to use limit orders to setup automatic purchases if the price falls to your pre-defined levels.

You could just do a little of both. I like about half of these funds on an exchange so I can setup automatic orders and the other half sitting snug inside my Revolut account.

Part 2

Once you’ve put aside some funds, you then need to decide the conditions under which you’d trigger a purchase and how large each purchase should be. Critically, I don’t setup a single price point to buy-in with these funds. Instead, I decide multiple prices (3-5) which I would be content to buy the cryptocurrency at. I’d then decide what percentage of my total pot I would spend at each of these price points. You could divide the funds evenly across these price points, but I prefer allocating a smaller percentage for smaller corrections (e.g., $20,000 to $15,000) and a larger percentage for larger corrections (e.g., $20,000 to $10,000).

I set price levels by reading the charts as best as I can and checking out what traders and investors (who are worth a damn) are saying. I tend to set price levels at: 100-day moving average, 200-day moving average, and previous resistance levels (nothing complicated or fancy). I always like to setup at least one ridiculously pessimistic price level, as I don’t want to be caught out and unable to take advantage of a major correction. You might never see those prices, but I like to be ready just-in-case. I didn’t realistically think the price of Bitcoin (BTC) would fall below $11,000, but here we are at nearly $8,000.

Last words

“Buy when there’s blood in the streets, even if the blood is your own” – Baron Rothschild

“Be fearful when others are greedy and greedy when others are fearful” – Warren Buffett

‘Buying the dip’ seems to be a strategy which many preach but do not practice. Although more involved than just dollar-cost averaging, buying chunks of cryptocurrency during deep market corrections can significantly reduce your average purchase price in the long-term. As long as the fundamentals haven’t changed and there isn’t some real devastating news, then these market corrections are opportunities in disguise. For this to work though, you will need to practice patience, think like a contrarian, and have a clear idea of what projects deserve your investment in the long-term.

Profit is more easily made on the buy-side, rather than the sell-side, of a trade. But to take advantage, you need to make a plan and get ready in advance. As I mentioned above, you want to have funds available to take advantage of the price as it goes all the way down. If you run out of funds when the market has corrected only 25%, then you miss a great opportunity if it corrects even more than that.

Anything to add?

I hope this post is useful for amateur investors like myself. If you have anything to add, please do let me know in the comments below or on Twitter.

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