Thousands Have Bought Bitcoin on the Recent Dip. Should You?

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Bitcoin's price dropped almost 50% in about six weeks, and some investors took advantage of the dip.

Bitcoin reached a peak of over $63,000 in April this year, but it's fallen dramatically since then. On Sunday, it dropped to $33,650 -- its lowest point since early February, and a 47% drop from its recent high. The price has risen slightly this week -- according to CoinMarketCap data, at the time of writing it sits at $39,188.

Some fear the sell-off reflects a drop in confidence in the world's first and largest digital currency. Others have seized the opportunity to buy more. According to data from Glassnode (via Coindesk), there are over 16,000 new Bitcoin "accumulation addresses." An accumulation address is one with at least two incoming Bitcoin transactions that has never spent funds.

Because people can hold more than one address, it is hard to be sure how many people this represents. However, it does show that thousands have bought and held Bitcoin in this dip.

There are several reasons for the recent price drop. These include:

  • Environmental concerns: Tesla CEO Elon Musk's tweet highlighting Bitcoin's high carbon footprint put the spotlight on the amount of energy Bitcoin mining consumes.
  • Regulation in China: Chinese authorities have restricted cryptocurrency trading in the country for years. But a recent Chinese crackdown tightened regulation even further, making it illegal for institutions to offer any form of crypto service.
  • Concerns about U.S. regulation: The U.S. Treasury announced it would take stronger action against cryptocurrency tax evasion, while the Fed hinted at the need for increased regulation.

Should you buy the Bitcoin dip?

Buying the dip is a popular expression, but the truth is, it's hard to do. You may be lucky and buy at the lowest point, but you may also buy only to see the price fall farther. A better question is: Do you see long-term value in Bitcoin?

If you think the price is reasonable and are ready to hold for five to 10 years or more, it doesn't matter if you don't catch the absolute low. Even if the price falls more tomorrow, that difference will likely be negligible in the long run.

For example, The Ascent's parent company, The Motley Fool, owns Bitcoin because it believes in its long-term potential. We don't know how far Bitcoin will fall in the coming weeks or months, but The Motley Fool is not investing for the short term. It sees a broader potential value for this digital currency.

Let's look at what the bulls and the bears (those who believe the price will rise or fall respectively) are saying on Bitcoin's long-term potential.

Bull market case

  • Bitcoin has gone mainstream. Bitcoin isn't going anywhere because it's bought, sold, and accepted by millions of Americans. Major retailers like Starbucks, Amazon, AT&T, Expedia, and Home Depot now accept Bitcoin payments through third-party apps. You can even buy it using Paypal. And 14% of Americans own crypto.
  • It has institutional buy-in. Big institutions like Morgan Stanley and Goldman Sachs plan to launch crypto funds, and Grayscale Investments (the world's largest digital currency asset manager) has over $40 billion under management.
  • Bitcoin is a hedge against rising inflation. Experts like Warren Buffet are warning of substantial U.S. inflation. Prices jumped suddenly in April, which means your dollar simply won't buy as much. Since Bitcoin supply is limited (only 21 million bitcoins will ever be produced), some argue that as the value of the dollar falls, it could be a safe store of value.

Bear market case

  • This is a Bitcoin bubble. Bitcoin bears continue to argue that the price is too high. They believe what we've seen this year is a cryptocurrency bubble, which could burst and leave investors with nothing.
  • Bitcoin doesn't have any inherent value. Critics say Bitcoin is too slow to function as a digital currency -- it can only process a limited number of transactions per second. And they think its price fluctuates too wildly for it to function as a store of value. Because it's an intangible asset, it is hard to pinpoint exactly what it is worth. And Bitcoin bears aren't optimistic on that front.

Are you ready to buy?

If you believe in Bitcoin's long-term potential, the next question to consider is whether you're ready to buy. There are two parts to this question.

  1. Do you have money to spare? If you're OK on retirement savings and have your emergency fund topped up, take a look at your other savings goals. If you have money to spare -- money you can afford to lose -- you're all good. But if, for example, you're saving for a house down payment, it isn't a great idea to put that cash into Bitcoin. This is an extremely volatile investment, and you don't want to ruin your chances of buying a house because your Bitcoin investments halved in value in a matter of weeks.
  2. Have you done your research? As we saw above, industry observers argue both sides of the Bitcoin debate. But it's your money, so what matters is what you think. Do you, like Mark Cuban, see the value in Bitcoin as a kind of digital gold? And do you want to invest in that type of store of value? Or do you believe blockchain technology is here to stay, and want to hold the biggest digital currency?

Only you know your risk tolerance and investment goals. This means only you can decide whether to buy Bitcoin today. If you decide to buy, all the top cryptocurrency exchanges sell Bitcoin. Use them to buy it safely, and hold through whatever ups and downs may come.

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