What's You're Strategy: Dollar Cost Averaging or Buying In The Dip?

We’re In a Bear Market Again. Should We Panic?

It has only been less than two weeks since the start of 2022 and yet the market is already suffering from a bear cycle. Prices of cryptocurrencies are currently down especially Bitcoin which is currently value at $42k+ as of time of writing. And if things continue as it is the prices of Bitcoin and other cryptocurrencies would have suffered even more before I could even publish this article.

That being said, should we start panicking now? Should we sell our cryptocurrency holdings to avoid even greater loss?

The short answer to the first questions is obviously “no” while the long answer to the second question would be it depends”.

 Certainly, it’s scary to see everything in the marker in red but that doesn’t mean that we should panic. On the contrary, we should do everything in our power to remain calm. Most people are aware of this but the more we panic the more mistakes that we’ll make.

Now as for whether we should start selling our cryptocurrency holdings depends largely on you current circumstances and strategies on how to survive the bear market. If you’re in need of quick money because you need to pay the bills then there’s really no reason not to sell, is there?

On the other hand is you have other source of income and is in it for a long haul then there’s really no need to sell. Of course if you don’t want to lose more money you could always swap your cryptocurrencies for stablecoins (USDT USDC, etc.), similar to what I did for some of my cryptocurrency holdings (note: this is not a financial advice).

Small time investors and traders like you and I might be nervous seeing our cryptocurrency holdings losing a lot of their value but  compared to large investors and traders, our loses are actually negligible. Moreover, instead of panicking, some of these investors and traders are buying in the dip.

Speaking of buying in the dip…

Should You Really Buy In The Dip?

In the crypto-space, you’ll often hear the phrase “buy in the dip.” This phrase simply meant to buy when the price of cryptocurrencies drops after a long uptrend which usually happens during a bear market. But should you really buy in the dip? And are there dangers that you should be aware of?

I think everyone knows this already but cryptocurrency is very volatile. Compared to traditional stock market, cryptocurrency is twice, or even more volatile. The reason for this volatility was due to various reasons like supply and demand, user and investors’ sentiment, government regulations and so on.

Depending on one or all of the factors stated above, the price of cryptocurrencies could easily go up or go down. And this is where the danger of buying in the dip comes in.

Since the price of cryptocurrencies could fluctuate at any moment depending on the market sentiment; the price of cryptocurrencies could continue to go down even though it seemed that the price has already bottomed. So if you bought cryptocurrencies at a certain price only to see the price go even lower; you pretty much suffered some financial loss.

Of course, since prices of cryptocurrencies would always bounce back, the financial loss that you’ve suffered could easily be mitigated if you’re just willing to hold onto your cryptocurrencies for some time.

Basically, the only time you’ll actually suffer some financial loss is when you started selling after seeing the prices go down in fear that of suffering from greater financial losses.

If buying in the dip possessed significant risk, what should we do to mitigate loses and possibly earn more during a bear market?

Dollar Cost Averaging

Instead of buying in the dip, expert traders suggested the use of Dollar Cost Averaging (DCA). But what’s Dollar Cost Averaging anyway?

Dollar Cost Averaging is an investment strategy where investors inject more funds to the same stock or cryptocurrency regardless of the market. What this mean was that instead of buying cryptocurrency in a lump-sum like those who buys in the dip do; investors should just keep buying the same cryptocurrency at a specified intervals.

The purpose of Dollar Cost Averaging (DCA) was to reduce the risk of lump-sum purchases of volatile assets like cryptocurrencies while also making some profits when the prices of said asset/s bounce back a little.

But although Dollar Cost Averaging seemed like the best strategy to use during a bear market, it too, has its drawbacks. One its drawbacks, and possibly the biggest, was that this strategy requires investors to keep in investing on the same stock, and would therefore, requires a large amount of money.

So if the stock you’re investing on keeps on falling, you must also keep injecting more money to the same stock to reduce loses and to keep the flow of profit. This drawback isn’t that big of a deal for big investors but for small-time investors with limited funds, it could be a problem which is probably the reason why some investors would rather take risk by buying in the dip.

The other drawback of Dollar Cost Averaging was the fact that although it has smaller risk, its return of investment is also lower in comparison when one buys in the dip. Though in a long bear market, Dollar Cost Averaging is without a doubt better in term of both risk and profit.

Conclusion

Investment strategies like buying in the dip and Dollar Cost Averaging (DCA) have their pros and cons. One strategy has higher risk but better returns while the other strategy has lower risk but smaller returns. But whether to use one strategy over the other depend solely on you, the investor.

Personally though, I actually prefer Dollar Cost Averaging as the risk is lower compared to buying in the dip BUT that’s just me so you don’t have to copy my strategy. Instead you should really do your own research (DYOR) because what seemed to be best for other people might not be the best for you.

I’ll end the article here. Thank you for reading. See you all again next time.

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Disclaimer: This article was checked for plagiarism using the online tool; plagiarism detector, and was proven to be 100% original.

My other articles: https://read.cash/@beastion