Find out what the industry insiders know
Most people have heard the term ‘buying the dip’. But there’s far more to discovering bargain assets than waiting for their price to drop before hoovering them up and watching the money roll in.
Buying the dip takes restraint and objective analysis. Anyone looking to add to their portfolio with this method should also have good knowledge of the market and be prepared to hold their assets for an extended period.
- General rules
- The basics of technical analysis
- Not everything will go back up
- Lay the foundations for your success early
- Know why you’re buying an asset
The 2022 bear market represents pain and loss for many, but also opportunity for others. Flourishing during a bear market is an activity usually reserved for the lucky few. But doing the hard work today can lead to good times in the future.
Below is a starter guide to Buying the Dip. We’ve compiled a set of rules, tips and tools to help you start thinking about how you might take advantage of the current conditions.
Some general rules to always bear in mind
Finding truly discounted assets is difficult. It’s why people get paid so much for doing it. So while not everyone can be the next crypto millionaire or hotshot Wall Street trader, there’s no reason why we all can’t learn some basic rules.
- Two things need to happen before you to buy the dip. Without both of these preconditions, you should avoid making a purchase:
- An asset needs to decline sharply in price.
- There needs to be a strong indication the asset will rise in price again.
- Manage your risk. Decide how much you can afford to lose and place an automatic stop-loss order on any trading you do. This means you will automatically exit your position once you’ve reached a predetermined price point. Basically, if the value of your assets goes too low, you sell them, thus cutting your losses.
- Be humble and tread with caution. Recognize that you won’t always read the signals correctly and remain objective so that you know when to sell up and move on. Buying the dip means, in theory, you are purchasing a strong asset that has declined but should go up again as the wider market recovers. Sometimes though, when you think you’re buying the dip, you might just be catching a falling knife that continues to plummet.
- Don’t make buying the dip your only strategy. Look into other ways of creating long-term profits. Dollar-cost averaging is one way of easing yourself into an asset over an extended period. You can also buy into a coin or NFT that is on the way up and exhibits strong enough fundamentals to suggest it will carry on in that direction. To do this, you need to learn the basics of technical analysis.
These rules should be at the forefront of your mind whenever you trade cryptocurrencies and NFTs. The final one, about using various techniques to realize profits, is one you can start working on today. It involves learning technical analysis so you can base your decision-making on something more certain than hype from shills.
Learn the basics of technical analysis
The following constitutes an introduction to cryptocurrency technical analysis. Further research and learning are required to fully utilize these tools:
Candlesticks represent a good overview of how a coin is performing over a day, a month or half a year. There are four parts to a candlestick, which are:
- The high price, which is the top of the wick.
- The opening price, which is the top of the bar.
- The closing price, which is the bottom of the bar.
- The low price, which is the bottom of the wick.
When a price ends the day lower than it started, the candlestick is red. When it ends higher, the candlestick is green. There are important candlestick patterns that indicate what is happening to a coin’s value over the longer term.
Relative Strength Index (RSI)
The RSI helps analysts measure the magnitude of recent price changes. It’s presented as an oscillating line graph below a price chart. You can use these calculations to work out the RSI and start putting it to use yourself.
It has a reading from 0 to 100 and values above 70 typically signify that an asset is overbought or overvalued. This means it could be time to sell up. If you get an RSI under 30, it means the opposite. It indicates it’s oversold or undervalued and the time might be right to buy.
If you use this indicator in conjunction with an analysis of support and resistance levels, you’ll have a good idea of which cryptocurrencies might be in line for an upcoming price rally.
Support and Resistance levels
Support and resistance levels show the point at which you can expect an asset to bottom out or peak, respectively. There are a few ways to determine these levels. As you’d expect, there are easier ways and more difficult ones.
A simple way to judge support and resistance limits is by looking at a price chart and see at which point the value of a token repeatedly pulls back or continually bottoms out. This isn’t particularly accurate and doesn’t take into account the activity of fellow traders.
A more useful way of working out the limits of support and resistance is to find out which people might buy and sell when an asset reaches a certain price point.
For example, we have some coins where a small group of dedicated whales control a large proportion of the overall market cap. The top 50 ETH holders control 17.93% of the entire ETH supply. This single wallet alone holds over $2 billion worth of ETH and is thought to be the largest individual holding of ETH.
If we know the average price at which these 50 people bought their ETH, we can get a rough idea of when they might cut their losses and sell their holdings. If they all do this at the same time, it could signal further declines in the ETH price as more of the cryptocurrency comes onto the market.
Another way to find support and resistance levels is by using moving averages. In a downtrend, the moving average line usually acts as a resistance. When the price hits it, it often rebounds upwards. Conversely, as the value of an asset is rising, it often meets resistance at the moving average line.
Moving Averages (MA)
To work out your MA, you need to find the closing price of an asset over time. Simply put, for a four-week MA, you would add together the closing price of your asset over a 28-day period. Then you would divide that number by 28.
Here’s an example of how you’d work out a seven-day moving average:
- Day 1: $4
- Day 2: $5
- Day 3: $3
- Day 4: $3
- Day 5: $2
- Day 6: $4
- Day 7: $5
Altogether, those dollar values add up to $26. Divide $26 by 7 and you have $3.71. If you got to Day 8 and still wanted a seven-day MA, you would add up everything from Day 2 to Day 8 and divide by 7.
As we’ve seen, MAs are often used to determine a stock’s support and resistance levels. You can also use them to help you decide if an asset is on an uptrend or a downtrend. An upward 200-day MA suggests that a stock has been increasing over a long period.
You can use MAs in conjunction with other indicators to help you decide if you think an asset is in line for a reversal or if it will carry on its present trajectory.
Knowing long-term moving averages and what they mean is a good way to avoid being sucked in by a Dead Cat Bounce. The video below outlines what they are. If you don’t see them coming, they can be dangerous.
Average Directional Index (ADX)
The ADX is a momentum indicator that helps determine the strength of a trend direction. It is accompanied by two other metrics: Negative and Positive Directional Indicators (DI). You can see the math required to find the ADX. It can be quite time-consuming to work it out each time you need to.
Fortunately, TradingView has developed a built-in ADX tool so that you can spot trends immediately and move quickly with your trades. ADX is measured between 0 and 100. The higher the number, the stronger a trend.
It’s important to note that the ADX rarely goes above 60. If the ADX is above 25, this means there’s a strong signal. And if it goes below 20, this signifies a weak trend.
Where the lines go, and whether or not they cross each other, can be a sign to buy or sell. For example, if the +DI line crosses the -DI line, this can be a good time to buy.
Ultimately the ADX is a good tool when it’s used in conjunction with others, as it tells you how likely a trend is to continue.
The tools above are examples of quantitative analysis. They are based on math and statistics. Never forget that less scientific tools also have their place in your armory.
Maybe you’ve seen a string of bad news stories about a particular project and think people will start losing confidence in it. Perhaps you have early knowledge that the charismatic CEO of a blockchain is leaving and this will affect the value of the network’s currency.
Charts and quantifiable trends are the best way to make good long-term decisions. But don’t discount your own intuition. And if something seems too good to be true, remember that it almost certainly is.
More technical analyses to look into
- On-Balance-Volume: this is a volume-based technical indicator. It looks at the accumulated trading volume of a cryptocurrency in a defined time period. Simply put, it shows you how many people are buying or selling an asset.
- Aroon Indicator: this tells you if a price is trending and what the strength of that trend is. It can be used for uptrends or downtrends.
- Stochastic Oscillator: this shows traders the most recent closing price of an asset compared to its highest and lowest price during a given period.
You can delve into technical analysis much further than this. And there are plenty of excellent resources out there to show you how.
Not everything goes back up
You’ll hear a lot of voices online telling people to be patient and hodl during the bear market. Soon, they say, everything will go back up. But as we know from the 2017 boom and 2018 crash, not everything that was a winner five years ago has made a resurgence today.
If we look at the top 10 coins by market value during the peak of the 2017 bull run, how many are still popular? How many of these are in today’s top 10?
Out of the 10 coins listed above, only four of them are still in today’s top 10 (see below). Unsurprisingly, BTC and ETH are still there. They’re the two biggest coins by market cap and won’t be dislodged from those positions any time soon.
Impressively, XRP has managed to maintain its place at cryptocurrency’s top table. How long it will remain there is another question. The coin reached its peak of $3.84 on 4th January, 2018. Even during last year’s turbocharged bull run, XRP could only get to $1.84, less than half of its all-time high.
The final coin that survived the 2018 rout and still sits at the table table for market cap is Cardano. The jury’s still out on whether or not this coin has a long future. It’s backed by the influential Charles Hoskinson and developers are making headway in their creation of NFTs and platforms on the Cardano blockchain.
History is littered with examples of once-successful companies falling away and collapsing. Don’t indulge in the fallacy that everything will rebound in the next bull run.
Lay the foundations for your success early
Profits may be realized in a bull run, but those who are successful in the long-term lay their foundations during a downturn. As Shelby Cullom Davis said, ‘You make most of your money in a bear market, you just don’t realize it at the time.’
If you plan on buying the dip, it’s not good purchasing assets when they’re already well on their upward trend. Today is always the best day to start doing your research to find out which coins and NFTs are the right ones for you.
Naturally, the price charts for cryptocurrencies and NFTs look very different. Cryptocurrencies are a medium of exchange on blockchains. They can be used to pay for network transactions or can be a platform’s governance token.
NFTs have a different utility. Holding them can grant entry to a specific community where the holder can get inside information, or access to real-world events. Some people hold them for their own sake, because they consider them works of art.
Ultimately, both of them are only as valuable as people decide. But the differences between the two mean the research tips below don’t always apply to both equally. Bear this in mind when you’re appraising a platform (and its associated currency) and an NFT project.
Find platforms or projects with strong fundamentals
DappRadar’s rankings pages is the best place to find the best platforms and projects. We list all of the best dapps across 47 blockchains. And we have the information broken down across nine different sectors, such as Games, DeFi, Exchanges and more.
We show the current balance in dollar value in a dapp’s smart contracts. We also show the number of unique active wallets that interact with dapp. Finally, we show the total volume, in dollar value, that has passed through a dapp’s smart contract over a given period.
The Sandbox is an example of a platform that we can find near the top of DappRadar’s rankings pages for Games. When I sort on volume, The Sandbox either comes at the top of the list, or near the top, depending on the time period we’re looking at. So maybe The Sandbox is a good platform to start researching.
You can do the same for NFTs. Again, DappRadar has a dedicated section for NFTs. We show Top Collections where we give six key NFT metrics, offering insights into an NFT project’s performance over a given period of time. We also show Top Sales, where you can see the most expensive NFTs that users are trading.
Start playing with these tools and learn how to use them to carry out your own analysis. You can also go to sites like Dune Analytics where a wide community of web3 enthusiasts create insights for free. DeFi Llama is another great place to start looking at cryptocurrency data and making informed choices.
Find out why the price of the asset has dipped
Now that you’ve found a cryptocurrency or NFT with an associated asset that has dipped in price, it’s time to find out why it’s gone down. Head to Twitter and start looking at news and rumors about the platform or project.
Maybe the price of a platform’s token went down because it pumped too aggressively during the 2021 bull run and came back down to earth as the bear market of 2022 set in?
If you find out that the founder of an NFT project has been involved in multiple rug pulls, it’s probably wise to avoid it. But if the price of an NFT dropped solely as a result of external factors, then maybe it’s still worth buying into, when it dips low enough.
Let’s look at The Sandbox again. The price of its SAND token reached an all-time high on November 25th, at the height of both the crypto bear market and the metaverse hype. Since then, it’s followed a downward trend and now sits well off its peak.
So we know a few reasons why the price of SAND has dropped:
- It was overpriced during the craziness of 2021.
- We know the US Federal Reserve increased interest rates which led to the market becoming more risk-averse.
- After the initial metaverse hype surrounding Facebook’s name change to Meta, people have stepped back and are working out what the metaverse means.
- Nothing much has happened in The Sandbox in 2022. Many companies have bought up land, but the virtual world itself is not yet functioning at full capacity.
There are external and internal factors for the drop in the price of SAND. But this doesn’t necessarily make it a bad product.
Find out about the platform or project
Do your research on their leader, their team, what their roadmap is, whether or not they reach their milestones when they say they will. Which angel investors have bought into the project, and do these investors normally back winners?
Join forums on Reddit and Discord. Talk to the committed community members who have done their own research and have strong knowledge. Google the platform or project and see what you can find. The internet is a very big place and has a long memory.
You should also try before you buy. If you’re looking at buying some AXS, start playing Axie Infinity and decide if you think the game has a future. Look into whether or not Axie Infinity’s creator, Sky Mavis, has big plans for the future. If you know that REVV Racing was once very popular and has a chance of making a comeback, open the dapp, have a few races and see for yourself.
If a platform or angel investor is big enough, you can read their company reports and check if they’ve got the money and personnel to see through on their promises. And check the stock prices of these companies. If the market is investing in them, maybe they know something you don’t.
If we return to our example of The Sandbox, we know it’s backed by Animoca Brands. The angel investor and all-round web3 powerhouse has lots of experience in running successful blockchain-based ventures. Animoca Brands itself has solid fundamentals and is headed up by Yat Siu, a prominent voice in the industry.
All the signs here point to strong leadership and good decision-making. And even during the current crypto winter, the company is still performing well.
The Sandbox is one of Animoca Brands’ most prized possessions and it’s likely the company will do everything it can to make the virtual world a success. If you think you can trust Animoca Brands to make the right choices, then maybe SAND is starting to look like a good opportunity at its current, deflated price.
Find out why you’re buying the asset you want to buy
After you’ve been through this discovery phase, you’ll have a real reason to buy your asset at a good price. Basing your purchases on solid research is the most important thing you can do. It’s what you’ll return to when market volatility and paperhands cause uncertainty.
If you know why you’re buying your asset, then you can hold onto it with confidence during the bad times. If you buy only on the basis that you’re buying the dip, what happens if the price drops further? Your decisions should be based on knowledge, not on a whim.
Do your technical analysis and find the best time to buy
Now you know what asset you’re purchasing, and why you’re purchasing it, it’s time to get in at the right price. Put your newly learned technical analysis to practice and start .
Because you’ve narrowed down your search to one or a handful of tokens or NFTs, you can give them your full attention. Read the price charts, look at the trends and follow the news about the platform or project you want to buy into.
Remember, only lucky people get their timing exactly right. But if you carry out your due diligence and follow the signs, you have a good chance of entering the market in a good window.
Know why you’re buying an asset
Having a good understanding of why you’re buying a cryptocurrency or NFT is the main key to long-term success. If you can’t explain your reasons to yourself or a friend, then you probably don’t know what they are.
Buying the dip is a catchphrase, not an investing strategy. Lots of work and knowledge goes into being successful by purchasing assets at a deflated value. You also need patience and to know when to cut your losses. The best way to make money is by not running out of it.
Keep in mind that if you purchase cryptocurrency, you’re buying into a blockchain. You’re also buying into all the dapps that are built on that blockchain and all the people who are working on it. You’re involving yourself in a nascent industry that still has plenty to learn about the direction in which it’s headed.
Similarly with NFTs, your success is dependent on thousands of other people. So find out as much about them as you can. And have fun as you get involved in their community.