Even quality assets like Bitcoin (CRYPTO: BTC) experience dips in their price sometimes. In fact, with cryptocurrencies, those dips can occasionally get quite steep, to the point where holders begin to lose their conviction and perhaps close their positions.
Planning ahead for these difficult moments is the best way to safeguard your portfolio’s value over the long term. Let’s evaluate the case for whether Bitcoin is a coin that’s always worth buying on the dip, or whether it’s a better idea to keep your cash when it isn’t performing well.
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Here’s why it’s worth buying, even when prices are down
First, let’s get a few things straight.
There’s no law of the universe that says Bitcoin’s price has to go up again after it falls significantly — though it has tended to so far. Likewise, its price can enter doldrums that last for years, potentially leaving investors underwater for equivalent amounts of time, which it has also tended to do in its life as an asset so far. Finally, you can’t change anything about those facts, nor can you be certain that buying it is going to be a good rate of return on your capital even over long holding periods. Other investments could perform better, or the coin might never grow to surpass the price at which you purchased it.
With that out of the way, it’s almost certainly a good idea to buy Bitcoin on the dip. Here’s why.
You probably already know that Bitcoin is a deflationary cryptocurrency, rather than an inflationary or fiat currency. Whereas fiat currencies have an amount of supply that increases over time, there can only be 21 million Bitcoins in existence, per the limits encoded into its protocol, and each of those will need to be mined. It gets harder to mine Bitcoin on a schedule of approximately every four years in a process that’s called the halving.
Therefore, while it is not guaranteed, there are substantial supply and demand dynamics that support the coin’s price over the long term. Those dynamics also ensure that it doesn’t need to continually experience higher quantities of demand for its price to continue rising, as its supply is forever more constrained than before, regardless of demand. Take a moment to absorb this idea in its entirety, because it’s an important one.
Now, consider the possibility of a sharp dip in price. Assume the price didn’t dip because the world was actually ending permanently. In this situation, what’s the argument against buying more Bitcoin while it’s cheaper than it just was?
If you’re like most investors, the arguments that come to mind are more about the particulars of your portfolio and your financial situation than anything else. Those are very reasonable, and it’s important to understand that it isn’t worth buying a somewhat riskier asset like Bitcoin if it leaves you without an emergency fund or enough money to pay your bills. Similarly, this isn’t an asset to acquire if you’re going to be holding it for fewer than four years or so.
But once those bases are covered, in the long run, there’s a lot to gain by buying the dip with Bitcoin. If you’re patient, the losses you incur will be temporary, even if they are painful. The trick is getting yourself to pull the trigger when it’s optimal, because right after the coin’s price drops is when it’ll make you nauseous to push “buy.”
Take impulsivity out of the equation for good
There’s an easy solution to getting yourself to buy the dip when it happens with Bitcoin. Always buy it in small chunks via a dollar-cost averaging (DCAing) strategy.
When you DCA, you’re buying the coin when the price is up, down, or sideways compared to your previous purchases. That enables you to build up a big position over time at a reasonable cost basis. You don’t need to worry about constantly watching the price and then building up the gumption to buy it. You can even automate these purchases on most investing platforms, so you won’t even need to think about the process at all.
Of course, if you have a strong stomach and you’re willing to pay a bit more attention, you can always supplement your long-term DCA strategy with timely purchases of Bitcoin when the price is relatively low compared to recent history. Just be aware that the same guidelines as always still apply: There’s no need to rush to build up a position if it means sacrificing your higher-priority financial or life goals.
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Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
