Crypto is dead.
Or so most news outlets would lead you to believe if you simply read the headlines.
With Bitcoin plummeting from over $68,000 per BTC to as low as $20,000, the crypto leader has seen a price drop of over 70% from its all-time high. And with multiple crypto lending platforms becoming insolvent, crypto venture capital firms going bankrupt, over $1 trillion in market cap erased from the cryptocurrency market and increased scrutiny from the U.S. federal government, maybe the headlines are right.
Or are they?
In this article we will cover the current cryptocurrency market conditions, the reasons behind the massive price drops, and whether you should buy the crypto dip. We’ll also cover how crypto should be treated as a part of your overall investment portfolio to help you understand whether now is the right time to buy.
Should I Buy the Crypto Dip?
“Buy the dip” has become the mantra of retail investors over the past few years, starting with the Gamestop (GME) and AMC Theaters (AMC) stock investors on the r/WallStreetBets Reddit forum. The idea is to buy a stock or asset when the price is falling, essentially getting it at a discount.
But is it a wise investing strategy?
Reasons to Buy the Dip
With Bitcoin over 50% from its all-time-high price, and several top-tier cryptocurrencies down even further, is now the time to “buy the dip?” Here are a few compelling reasons to consider investing in crypto while the prices are low:
1. Crypto Market Cycles (Crypto Winter)
Cryptocurrency has only been around for just over a decade (2009), but there has emerged a pretty clear market cycle based around the “Bitcoin Halving” that occurs roughly every four years. The halving causes the rewards for Bitcoin mining to cut in half, making it twice as difficult to mine new Bitcoins, and thus lowering the overall supply growth of Bitcoin.
This phenomenon has typically preceded a massive upswing in price, with previous cycles seeing Bitcoin rise as much as 10,000% from the bottom of the cycle to the top. And when the Bitcoin price rises, so does the price of the entire crypto market, sometimes even more so.
According to the four-year market cycle theory, 2022 is the beginning of a crypto bear market (known as “crypto winter”) that will last until the next Bitcoin halving, which will happen sometime in early 2024. During a bear market, prices remain depressed, and may be a good time to accumulate Bitcoin and other cryptocurrencies you believe will last through the next cycle.
2. Institutional Adoption
From 2020 to 2022, multiple Fortune 500 companies invested in Bitcoin and other cryptocurrencies like Ethereum, sometimes to the tune of billions of dollars (hey there, Elon!). This massive institutional adoption helped make Bitcoin and other top cryptocurrencies a household name for the first time, and increased the market capitalization (market cap) of the crypto market from about $300 billion to over $2 trillion at the peak (now back down to about $1 trillion).
Although some crypto enthusiasts may say that institutional buying is antithetical to the mission of decentralization that Bitcoin set out to accomplish, it no doubt boosts the credibility of crypto as an asset class. And with institutional adoption comes more media coverage and widespread adoption from investors that may have never considered investing in crypto.
Bottom line: The more institutions buy crypto, the stronger the asset as a long-term investment. Buying the current dip may be a stronger investment than it was a few years ago when most companies did not own any crypto assets.
3. All Cryptocurrencies Are on Sale!
The long-term goal of any investment is to buy when the price is low and sell when the price is high. And if you believe that your favorite crypto will eventually surpass its previous all-time-high price, then everything is on sale!
With Bitcoin dropping as much as 70% and other cryptocurrencies dropping 80% or more, this is a massive discount. It’s like walking into Target with an “80% off everything” coupon and loading up on your favorite items.
If you are a crypto investor who was buying when the prices were high, then it only makes sense to buy more when everything is priced much lower. Over the long term, this will help lower the average price at which you bought a crypto asset, and increase your gains.
Reasons NOT to Buy the Dip
Although cryptocurrency has grown exponentially over the past decade, it may not be the best investment choice for some. In fact, it may not be a good investment at all. Here are a few reasons you should NOT buy the crypto dip:
1. You Don’t Have An Emergency Fund
Repeat after me: “Bitcoin is not my emergency fund.”
If you are thinking of dumping all your excess cash into crypto while the prices are low, but you don’t have enough money to cover a $1,000 emergency — as many Americans don’t — then you should not buy the crypto dip.
Your emergency fund should be a stack of three-to-six months’ worth of expenses in cash, preferably in a liquid savings account. This means your 401(k), brokerage account, crypto wallet, certificates of deposit (CDs), or other investments are not your emergency fund. And neither are your credit cards, by the way.
Emergency funds are meant to be used in the case of a financial emergency, such as a broken car transmission or leaky water heater. Before going “all in” on this crypto dip, you should put away a few months’ expenses in cash into a savings account first. That way, you aren’t forced to sell your crypto at a loss if you need to fix your car.
2. You Have No Other Investments
Look, I get it. Crypto is a world-changing technology that is helping revolutionize the finance industry, and may even replace the current monetary system of some countries. But as an investment, it is speculative at best, and going “all in” on a single asset class is not a sound investment strategy.
Diversification is key when building an investment portfolio, and investing outside of the crypto market is important for long-term investors. Taking advantage of the tax benefits of 401(k) and Roth IRA accounts is a good place to start, as investors are incentivized with tax breaks. Investing in multiple asset classes like stocks, bonds, and real estate can help create a more balanced portfolio to improve the risk-adjusted returns.
If you don’t have a long-term investment strategy outside of “#YOLO into the crypto dip,” you’ll want to rethink your approach. A good investing strategy involves setting goals, assessing your risk tolerance, and investing with a long-term outlook.
3. You Can’t Handle the Crypto Rollercoaster
Do you enjoy theme parks? How about extreme roller coasters?
Investing in cryptocurrency is like jumping into an extreme roller coaster that brings you way up in the sky, and then plummets to the ground at break-neck speeds. The balance of your crypto investments can grow 10x in a month, only to lose 90% in a day.
If you can’t stomach the thought of your money growing rapidly and then dropping by a massive amount overnight, investing in crypto may not be for you. And even though the crypto market has plunged more than 60% from the previous all-time high, there’s nothing stopping it from dropping an additional 60% from here. Do you have the guts to HODL?
As with any speculative investment, you should never put in money that you can’t afford to lose. But even with that in mind, it can be unnerving watching your hard-earned money evaporate within a few hours. If you are not prepared for the crypto rollercoaster, don’t get on board the ride.
Verdict: Should You Buy the Dip?
Buying crypto right now could be a great investment decision. Or it could ruin your finances. Nobody knows where prices will go from here.
Before choosing to buy the crypto dip, you need to ask yourself a few questions:
- Do I have cash set aside for emergencies?
- Can I afford to lose my crypto invested funds?
- Do I have the stomach for the massive crypto price swings?
- Do I believe in the long-term viability of my favorite cryptocurrency?
- Do I have investments outside of crypto to help fund my retirement and other financial goals?
If the answer is “yes” to all the above questions, this might be a good opportunity to buy the crypto dip at your favorite crypto exchange. Some cryptocurrency prices are 70% off (or more) compared to their highs, and some of the more promising cryptocurrencies might provide massive returns over the coming years.
If you answered “no” to any of the questions above, it’s probably best to rethink your investing strategy and get a financial foundation in place before buying the crypto dip.
Investing in crypto is exciting. As a brand-new asset class, there is so much disruption and innovation coming to the market that it can be hard to stop yourself from going “all in.” But crypto is still a speculative investment that can destroy your finances in a hurry if you don’t have a plan in place.
Yes, crypto is over 50% off, and investors buying the dip may have the opportunity for outsize returns in the future. But the market can still drop further. Having a long-term mindset and buying crypto on a regular schedule can help you dollar-cost average into the market and take advantage of the dip.
If you don’t have an emergency fund in place, don’t have any traditional investment accounts opened, or aren’t sure of your investing goals, you should avoid this crypto dip. Yes, the potential returns are exciting, but they are not guaranteed, and having a foundational investment plan in place is more important than gambling on the price of Bitcoin.
Crypto innovation is here to stay, so don’t feel too bad if you miss this investment opportunity. There will always be others.