A dip is a rapid decrease in the value of a security (such as a stock, bitcoin, oil, etc.). Dips occur daily in all kinds of effects. Especially in the crypto market, we witness dips occurring on a regular basis. You can respond and use this to your advantage by buying an effect in a dip and sell it at the next top. This strategy is also called ‘Buy the dip’.
In the image below the blue arrows indicate dips.
Beginning of a downtrend?
The problem is that a dip is easy to recognize on a historical chart, but much more difficult to see on a live chart. If an effect has made a sharp drop, it may seem like a good entry point, but it doesn’t have to be that way at all. A well-known saying therefore is ‘never catch a falling knife’. In the example below, it is clear from the blue arrows that a dip can also be the beginning of a downtrend.
To buy a cryptocurrency on a dip, you actually have to wait until the price has recovered a bit. It is also important to validate that a dip is temporary and not the beginning of a ‘downtrend’. For this purpose, numerous techniques and strategies can be found on the internet (both fundamental analysis and technical analysis).
Verifying a dip with a technical analysis
With a technical analysis you don’t look at the fundamentals of an effect, but at the price with a set of indicators. The more technical indicators indicate that the price should rise again soon, the stronger the signal will become. The chart below shows an example of a dip in combination with technical indicators.
Verifying a dip with a fundamental analysis
To verify a dip, you can also apply a fundamental strategy. The best known fundamental analysis strategy comes from the most successful investor Warren Buffet. He owes his success to the intrinsic value strategy. In short, the actual value of a share is calculated. If the market price during the dip is far below the actual value of a share, that indicates it’s a good time to buy.
The intrinsic value of a cryptocurrency or token cannot be calculated in this way. After all, you do not buy a part of a company, but rather a part of a network or ecosystem. The more people use that network, the more likely it’s coin increases in value. Since investing in crypto is quite new for most people, not many theories have been developed and tested out yet.
An important difference between cryptocurrencies and shares is also that the supply of a cryptocurrency usually increases, which in theory has a downward effect on the price. This is due to mining, built-in inflation or release of pre-mined coins. In the case of shares, this only happens in the case of an equity issue.