Buying the dip, or more likely known among other financial circles as increasing a portfolio position in a market correction, is one of the saner trading strategies that I have seen among crypto circles.
Opening and closing these trades are often positive and lead to decent gains for a portfolio, but it is the trades in between these that cause the damage. It is often a lack of patience and eagerness to act that causes this. In the fast paced world of crypto, many believe that if they are not constantly changing their portfolio, they will be falling behind. This leads to many small losses that add up, or I should say, subtract.
Some of the most brilliant investors to ever grace this Earth- Warren Buffett and Charlie Munger- believe that a portfolio only needs to have action on a very irregular basis, and that the majority of time should be spent ‘sitting on your hands’.
Obviously the crypto market is very different to the stock market in how quickly it changes, so therefore you can’t expect to leave your account for 50 years and expect to come back with happy results. This hand sitting must be thought about in a much shorter time frame, albeit with the same importance.
The most important thing for a portfolio’s long term health is not the upside, but the downside. In an equally weighted portfolio, something going to zero is far more harmful than one doubling is positive. Do the math. In the crypto market, long term exposure in a diversified portfolio guarantees both of these outcomes.
I propose a strategy that decreases this downside risk while providing the opportunity to take advantage of the ‘dips’.
This strategy takes advantage of the optionality of cash and it’s inherent stability against the backdrop of crypto’s volatility. Bitcoin has seen a plethora of these drops over it’s short lifetime, far more than any traditional asset would experience. Good periods of capital appreciation were eaten up in these 1 to 2 day events. However, each time the price has recovered to reach new heights.
You can take advantage of this by holding your portfolio in cash for the majority of the time, only deploying it in corrections. A correction is defined as a drop in an assets value of more than 10%, and in our case preferably a rapid drop. What about opportunity cost? I counter with what about the cost of these significant drawbacks? The beauty of this strategy is extended through the complete lack of the need to predict. All technical analysis goes into trying to predict the future from the past, but with optionality there is no need for this. You simply play each day as it is, not going into any position where there isn’t room for proper recovery.
The optimal time to use this play is during a marketwide collapse based on news, leading to an overreaction. During these times it is basically a bargain sale, although I would be wary of buying small coins that dropped in this time, there are most likely other circumstances leading to this (personal experience). It is important to spread the cash over several positions (more than 10 but less than a ridiculous amount such as 100).
In a more regular market, it pays to have a watchlist of coins with good projects with a future behind them, and when there is an inevitable market correction, to load up on them.
Here comes the second major part of this play: taking profits. Often greed comes into play, you see a 10% gain in a day, then a 20% gain in three, then they are all gone. My personal strategy is to have an exit before entering, which changes subjectively. This way greed’s influence is erased, and I simply have to press sell. The aim of this game is not to hit home runs, but to slowly accumulate small profits thanks to the irrationality of the market. Yes, I know, it’s boring for an exciting market, but in the words of George Soros, “If you are having fun trading, you are doing it wrong”.
By quickly selling, you are returning to a state of optionality, which is far more valuable than the next so-called Bitcoin. No crystal ball is required, just cool calm rationality and taking advantage of the opportunities Mr Market on ecstasy provides.
Thanks for reading,
James Clarke
I am not a financial advisor, this is my opinion, I am not liable for any losses you incur from this strategy.