Bitcoin Price Drop, Buying On The Dip, And How To Do It Responsibly

5 Cryptocurrencies That Ran Circles Around Bitcoin in 2021 | The Motley Fool

I’ve been following Bitcoin for many years now. I’ve seen it rise, fall, crash, rise, surge, crash again, and then rise. To say it’s a volatile product would be like saying Antarctica gets chilly in the winter. It’s volatility is one of its most notable features and it’s also why most consider it a risky investment.

As a result, this is not the kind of investment you treat like your typical blue chip stock. It’s not even the kind of investment you treat as a risky gamble in the mold of r/wallstreetbets. Bitcoin and many cryptocurrencies like it are an emerging technology that not enough people understand. The fact that so many don’t understand it or its utility have led some to call it an outright scam.

I don’t agree with this at all. Unlike actual scams, the math and mechanisms behind Bitcoin are not secret. You can look them up right now. Here’s a link to the original whitepaper made by its mysterious creator, Satoshi Nakamoto. The purpose of Bitcoin is right in the abstract. It’s a tool for sending money directly to people without the need for a financial intermediary.

That’s a technology that has legitimate value. In an increasingly connected world, that’s a value that will likely increase over time. For that reason, I ended up buying some Bitcoin for myself, which I documented on this very site. I plan on buying more down the line, provided I have the extra cash.

I also intend to maintain that plan, even though Bitcoin recently experienced a significant crash in price. Again, it’s a volatile product. It’s value will rise and fall erratically. Since 2010, I’ve seen it crash before. Back in 2013, Bitcoin’s price was around $1,000 and it crashed hard towards the end of the year. At one point, it went all the way down to $200.

At the time, people said that was the end of Bitcoin.

That was the end of cryptocurrencies.

They were wrong. Bitcoin recovered, went up even further, and continued to gain more and more acceptance.

At this point, predicting that Bitcoin will completely collapse any day now is like saying the internet is a passing fad. It’s absurd, short-sighted, and misses the bigger picture. Like it or not, Bitcoin and cryptocurrencies are here to stay. Entire countries like China can try to ban it, but the genie is out of the bottle now. There’s no going back.

On the other end of the spectrum are those who actually celebrate the crash in Bitcoin price, but not because they think it’s going to collapse. Instead, they see it as an opportunity to buy Bitcoin cheap and hold it until the price rises again. It’s not a new idea. That’s something skilled investors have been doing for years with stocks.

It doesn’t always work out. Sometimes, buying the dip means buying stock in a company that’s about to go bankrupt. Just ask anyone who bought stock in Bear Stearns. You can actually lose all your investment by buying the dip in a wrong company. For that reason, you should not see it as a viable trading strategy.

With Bitcoin, investors and speculators like to use Bitcoin’s ability to recover and continue despite many previous collapses as strength whenever they buy the dip. It’s not entirely misguided. Even I’ll wait for the price to dip a little before I buy new Bitcoin.

However, there’s a right way and a wrong way to buy into the dip of any asset. I say that as someone who is not the least bit qualified to give investment advice, but having followed Bitcoin for so long, I’ve seen more than a few people make the same mistakes.

They see the price dip and they either try to sell all their Bitcoins off or they try to buy as much as possible with whatever money they have. Both are byproducts of panic and anxiety. People don’t make wise decisions when they’re in that state of mind, especially when it comes to money. It’s why Warren Buffett is so successful. He stays calm when things are chaotic and doesn’t let knee-jerk reactions drive his decisions.

Even though Buffett himself is not a fan of Bitcoin, his strategy still holds true for Bitcoin. That means when you see the price sink, you shouldn’t panic and sell everything. You also shouldn’t take all your money and throw it into Bitcoin, either. Again, Bitcoin is volatile. You will lose money over time if you’re also volatile.

That’s why, whenever there’s a price drop in Bitcoin like this, I only buy a little extra. It’s not much. I just go to a Bitcoin ATM and buy about $100 to $200, depending on how much extra cash I have on hand. Most importantly, I never buy Bitcoin with money I can’t afford to lose. I only ever use excess cash I have on hand. It’s not something I put in my retirement portfolio.

Maybe that will change one day, but only if Bitcoin and other cryptocurrencies like it become less volatile. Since I don’t see that happening anytime soon, I’m content with just buying on the dip with whatever pocket money I have. Most of my money will still remain safely invested in index funds.

That would be my advice to anyone looking to “buy the dip” with Bitcoin or any investment. Do not put all your eggs in one basket. If you’re going to do it, only use money that you can afford to lose. The rest of your money should be in safe, low-cost index funds. That way, if Bitcoin ever tanks severely, you’re not wiped out.

Conversely, if Bitcoin rockets up in value, then you’ll just have some extra money on the side later on. Regardless of how close you are to retirement, that can only help.

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