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Should You Buy the Crypto Dip? 3 Things to Know

By Katie Brockman - Jun 3, 2021 at 3:17PM

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Buying the dip can be a smart way to invest on a budget. But is it the right time to buy crypto?

Cryptocurrencies are crashing, with all the major tokens -- including Bitcoin (BTC -2.01%), Ethereum (ETH -2.02%), and Dogecoin (DOGE -6.63%) -- taking a serious hit over the past few weeks.

While this might be unsettling news for crypto supporters, it can be a good buying opportunity. With this latest downturn, crypto prices have dropped substantially. Bitcoin, for example, costs around $39,000 per token as of this writing. That's down from its peak of around $65,000 back in April.

If you've had your eye on cryptocurrency for a while but have been waiting for it to become more affordable, it may be wise to buy the dip and invest when prices are lower. But there are three things you need to know before you buy.

Young person sitting at a laptop looking at charts

Image source: Getty Images.

1. Consider whether it's the right time to buy crypto

It's never a good idea to buy something just because it's on sale, and crypto is no different. Prices may be lower right now, but that doesn't necessarily make it a good investment for everyone.

Before you invest, think about whether you can handle the risk that comes with crypto. There's a chance you could lose all the money you invest, so if you're in a tough spot financially, it may not be the right time to invest in cryptocurrency.

Make sure you have a healthy emergency fund and a well-diversified portfolio before you even consider buying crypto. If you put every spare dollar toward cryptocurrency and prices continue to fall, you could be putting your financial future at risk. You may be forced to sell your crypto investments if you face an unexpected expense, and if prices have plummeted, you could end up losing money.

2. Understand how volatile crypto is

The general assumption behind buying the dip is that prices will bounce back eventually. And by investing now when prices are lower, you stand to see higher earnings when prices increase. While that might be true when you're buying stocks from strong companies or broad-market ETFs, that might not always be the case with cryptocurrency.

We're still in the early stages of the crypto movement, and nobody knows for sure whether it will survive over the long term or not. While many cryptocurrencies have managed to bounce back after previous crashes, there's no guarantee that they will always recover.

In other words, don't buy under the assumption that cryptocurrencies will experience the same upward trajectory from a few months ago. Prices could skyrocket once again, or they could continue falling.

This doesn't necessarily mean you shouldn't invest now, but it is important to be cautious. Again, only invest money you can afford to lose, and don't go into this investment with the expectation of getting rich.

3. Choose your crypto investment wisely

Not all cryptocurrencies are created equal, and while all are risky, some are more likely to succeed than others.

Before you invest, think carefully about which cryptocurrency you're considering buying. Like you would with stocks, examine the crypto's underlying fundamentals to determine whether it's likely to grow over time.

This can be challenging with cryptocurrency, because it's uncertain whether crypto in general will become mainstream someday. But consider how much utility a particular currency has and think about whether it has any competitive advantages in the industry.

For example, buying big names like Bitcoin or Ethereum is less risky than buying trendy new currencies like SafeMoon or Dogecoin. Bitcoin and Ethereum have real-world uses, while many smaller cryptocurrencies don't have much utility (yet, anyway). The more utility a cryptocurrency has, the more likely it is to succeed over time. Trendy currencies may see their prices spike in the short term, but they're less likely to see long-term growth.

Before you buy any cryptocurrency, make sure you've done your research and are prepared for the inevitable ups and downs. In general, crypto is a high-risk investment, so it's not right for everyone. But if you're ready to buy, buying the dip can be a smart move.

Katie Brockman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Ethereum Stock Quote
$1,833.47 (-2.02%) $-37.84
Bitcoin Stock Quote
$23,384.50 (-2.01%) $-479.81
Dogecoin Stock Quote
$0.08 (-6.63%) $0.01

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