What is Buy the Dip?
tldr: Buy the Dip means to continually buy an asset that’s falling in price in the hopes of catching a low average price.
By now you have heard the phrase “Buy the Dip” — no doubt on social media, the home of fun finance terms.
So what does it mean?
Typically investors use this phrase to describe the act of buying more of an asset each time the market drops. The primary goal of buying the dip is to accumulate more of the asset at a lower price.
How does Buy the Dip work?
Essentially, the process is quite simple. It involves making ongoing purchases of the same asset over a period of time. The timing of the purchases is important in this case. As a “dip” could occur at any time, a purchase could also occur at any time.
It should be noted that buy the dip is a reference to Value Averaging. Often Buy the Dip is associated with the phrase Dollar Cost Averaging, however this is incorrect. Value averaging is the correct reference.
Example of Buy the Dip
In the above technical analysis chart, we can see that during 2018, Bitcoin (BTCUSD) was experiencing a falling market. A Buy the Dip advocate would be looking to take advantage of these dips in price.
As an example, if this person was to purchase 1 Bitcoin at each of these dips, we would see the following purchases:
- $14,497
- $13, 518
- $8,202
The goal here would be to gradually lower the average price paid per Bitcoin. This being the case, we can take an average across the 3 purchases and determine that they paid approx. $12,072 per Bitcoin (excluding fees)
Buy the Dip Culture
Buy the Dip culture is popular on social media. There is this strange feeling of comradery when everyone fails together. Phrases like “bought the dip, but the dip kept dipping”. Another way of saying that the intended grab for a low price failed. This is largely due to the popularity of “Buy the Dip” combined with a lack of technical knowledge which leads to mistakes such as buying during a downtrend and then being surprised when the trend continues.
Value averaging (which is what we are talking about) only works if its part of your long term investing strategy and you have enough cash reserves to support the ongoing buying. Buying the Dip is typically a poor strategy for traders because they are effectively trying to catch a falling knife. This is impossible to manage in terms of risk.
Key Takeaways
- Buy the Dip is a social media buzz phrase
- It means Value Averaging
- Investors use Buy the Dip to reduce their average purchase price of an asset
- Buy the Dip can also be referred to as BTD and BTFD (Buy the F***ing Dip!)
- This strategy is for a certain type of investor, it is not applicable to all people
- Buy the Dip is rife on social media, often pushed by amateur traders
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