In the world of crypto, "buy the dip" is such a popular investment strategy that it has become an internet meme. As a result, many people may not even think twice about buying a beaten-down crypto like Bitcoin (BTC 0.45%). As soon as the price of Bitcoin declines, they are ready to buy the dip.
However, if you are thinking about buying Bitcoin now, there are a few things you should keep in mind from the world's smartest investors.
Past returns are no guarantee of future results
In any investment prospectus, you will find a warning along the lines of "Past returns are no guarantee of future results." And that's in there for good reason. Just because a stock has gone up in the past is no guarantee that it will go up again in the future.
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And you can apply this same type of thinking to crypto. Yes, Bitcoin has increased in value remarkably since its creation in 2009, but there are some obvious (and not-so-obvious) reasons why this past performance may not continue in the future.
What happens, for example, if investors wake up one day and determine that Bitcoin is no longer "digital gold," or if proof-of-work cryptos such as Bitcoin fall out of favor due to environmental concerns about energy consumption? A rapidly changing regulatory environment could also impair future performance.
The good news for Bitcoin investors is that this cryptocurrency has continually rebounded after every major market correction, inspiring confidence that it will do so once again.
Diversify, diversify, diversify
One of the hallmarks of a smart investor is a well-diversified portfolio. This is really just a version of the classic saying, "Don't put all your eggs in the same basket." This implies that you should not make Bitcoin your only crypto investment, and certainly not your only portfolio investment.
Yes, there are some Bitcoin maximalists out there who suggest that the only crypto you ever need to buy or hold is Bitcoin. But think about it: Do you really want to tie a big chunk -- much less all -- of your personal net worth to a single cryptocurrency?
Of course, you don't want to over-diversify. One of the most famous investors in the world, Peter Lynch of Fidelity Investments, once noted, "Owning stock is like having children -- don't get involved with more than you can handle." This is good advice for crypto investors, considering how many cryptos are out there to buy. There are literally thousands of crypto tokens, and many people make the mistake of buying up cheap, highly volatile cryptos that they don't know anything about. A small, well-diversified crypto portfolio should be your goal.
Only invest what you can afford to lose
Over time, Bitcoin may turn out to be the greatest store of value ever created. For years, people have been routinely predicting incredible gains for Bitcoin. Some investors, such as Cathie Wood of Ark Invest, have even suggested that the value of Bitcoin might exceed $1 million per coin by 2030. On the flip side, Warren Buffett has warned that it could go to zero. Some crypto investors such as Michael Saylor have even opined that the investment future for Bitcoin might be binary -- either it goes to $1 million or it goes to zero.
With such a range of outcomes, you should only invest what you can afford to lose. At the very least, make sure you are leaving yourself some margin of safety. One way of doing this is by using a technique like dollar-cost averaging. This will prevent you from getting into the trap of buying high and selling low when you should be buying low and selling high.
So should you buy Bitcoin?
At the end of the day, the decision to buy Bitcoin on the dip is more nuanced than you might think. You don't want to buy the dip if the dip keeps dipping.
With the proper risk management tools in place, though, buying the dip in Bitcoin can be a very successful investment strategy to help build your overall crypto portfolio.
