Buy Bitcoin on the Dip? 3 things the smartest investors know about crypto
In the crypto world, “buy the dip” is such a popular investment strategy that it has become an internet meme. As a result, many people may not even think twice about buying a defunct crypto-like Bitcoin (BTC -0.84%). As soon as the price of Bitcoin drops, they are ready to buy the dip.
But if you’re thinking about buying Bitcoin now, there are a few things to keep in mind from the world’s smartest investors.
Past returns are no guarantee of future results
In any investment prospectus you will find a warning along the lines of “Past returns are no guarantee of future results.” And it’s there for good reason. Just because a stock has gone up in the past, there is no guarantee that it will go up again in the future.
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And you can apply the same kind of thinking to crypto. Yes, Bitcoin has increased in value remarkably since its creation in 2009, but there are some obvious (and not so obvious) reasons why this past performance may not continue in the future.
For example, what happens if investors wake up one day and determine that Bitcoin is no longer “digital gold,” or if proof-of-work cryptos like Bitcoin fall out of favor due to environmental concerns about energy consumption? A rapidly changing set of regulations can also weaken future benefits.
The good news for Bitcoin investors is that this cryptocurrency has consistently recovered after each major market correction, giving confidence that it will do so again.
Diversify, diversify, diversify
One of the hallmarks of a smart investor is a well-diversified portfolio. This is really just a version of the classic saying, “Don’t put all your eggs in one basket.” This means that you should not make Bitcoin your only crypto investment, and certainly not your only portfolio investment.
Yes, there are some Bitcoin maximalists out there who suggest that the only crypto you need to buy or hold is Bitcoin. But think about it: do you really do you want to tie a large portion – much less all – of your personal net worth to a single cryptocurrency?
Of course, you don’t want to over-diversify. One of the most famous investors in the world, Peter Lynch of Fidelity Investments, once said: “Owning stocks is like having children – don’t get involved in more than you can handle.” This is good advice for crypto investors, considering how many cryptos are out there to buy. There are literally thousands of crypto tokens, and many people make the mistake of buying up cheap, highly volatile cryptos that they know nothing about. A small, well-diversified crypto portfolio should be your goal.
Only invest what you can afford to lose
Over time, Bitcoin may prove to be the greatest store of value ever created. For years, people have routinely predicted incredible gains for Bitcoin. Some investors, such as Cathie Wood of Ark Invest, have even suggested that the value of Bitcoin could exceed $1 million per coin by 2030. On the flip side, Warren Buffett has warned that it could go to zero. Some crypto investors like Michael Saylor have even suggested that the investment future of Bitcoin could be binary – either it goes to $1 million or it goes to zero.
With such a range of outcomes, you should only invest what you can afford to lose. At the very least, make sure you give yourself a margin of safety. One way to do this is to use a technique such as dollar cost averaging. This will prevent you from falling into the trap of buying high and selling low when you should be buying low and selling high.
So Should You Buy Bitcoin?
At the end of the day, the decision to buy Bitcoin on a dip is more nuanced than you might think. You don’t want to buy the dip if the dip continues to dip.
However, with the right risk management tools in place, buying the dip in Bitcoin can be a very successful investment strategy to build your overall crypto portfolio.
