Why You Can’t “Buy the Dip”
“Buy the dip.”
You hear this all the time in crypto investing. It refers, of course, to buying more bitcoin (or digital assets) when they go down in price: when the price “dips.”
Some people brag about “buying the dip,” as if they know better than the crowd. Others “buy the dip” as an investment strategy, as if they’re getting a bargain.
The problem is, buying the dip is a myth.
You can’t buy the dip, because you can’t see the total dip until much later.
First, I’ll explain this in a way that will make it simple and obvious to you; then I’ll show you a better way of investing.
You Only Know the Dip in Hindsight
When people talk about “buying the dip,” what they’re really saying is, “I bought when the price was going down.”
Here’s a look at the price of bitcoin from earlier this year. When it dropped to $39,000, El Salvador President Nayib Bukele proudly tweeted that his government had just purchased an additional chunk of bitcoin: that it “bought the dip.”
But the next day, the price of bitcoin dipped further, to $34,500:
Could you “buy the dip” then? No, because the next day, it dipped further still, to $33,500:
We could take any time period, for any cryptocurrency, and show this same principle: you can only see the dip in hindsight, after the price has gone back up.
This assumes, of course, that the price will go back up. There are plenty of investors who “bought the dip” on their favorite token, only to find out it wasn’t a dip, but a ride off a cliff:
The idea behind buying the dip is right: we want to “buy low, sell high.” We want to think differently from the crowd. But the practice of buying the dip? It’s a terrible way to invest.
There’s a better way, which is steady-drip investing.
Steady-Drip Investing (a.k.a. Dollar-Cost Averaging)
In steady-drip investing, you just invest the same amount, every month, regardless of the price. That’s it.
Ideally you set it up as an auto-withdrawal from your bank account, so you never even have to think about it.
The financial advisors call it dollar-cost averaging, because they have to make everything sound more complicated. The principle is that by investing the same amount every month, you get more or less the “average” price over time.
There are plenty of academic papers arguing against this method of investing. I went down the research rabbit hole reading these papers for you, and I’m convinced that the academic theories fall apart when they encounter real-life investors. I’ll make this brief.
Value Averaging vs. Steady-Drip Investing: Some academics have shown a “value averaging” approach will perform slightly better than steady-drip investing. Marshall (2000) calls the value averaging method “simple,” before describing how it works:
The investor sets a predetermined worth of the portfolio in each future time period, as a function of the size of the initial investment, the size of periodic investments and the yield expected. The investor then buys or sells sufficient “shares” or units of the investment such that the predetermined portfolio worth is achieved at each revaluation point.
Like he said, “simple.”
In value investing, you basically set a “target value” to hit each quarter with your portfolio, then you buy or sell the proper amount of bitcoin each quarter, depending on the current price. In real life, most investors don’t have the time, discipline, or spare cash to do this over the long term (5+ years).
Random Investing vs. Steady-Drip Investing: There’s also research (Marshall and Baldwin, 2006) that shows steady-drip investing does about the same as “random” investing, but their definition of random investing is “deciding 50/50 each quarter whether to invest,” which is just not how investors work.
Most investors decide to buy when they get excited about it, say by reading an inspiring article on bitcoin, or having a friend tell them about it. They’re not looking at the price of bitcoin once a quarter, then flipping a coin: “Heads I buy, tails I don’t.”
It’s this truly random behavior that’s impossible to fit into any academic theory, because it’s random. This kind of real-world “invest when I’m inspired” approach ultimately comes down to luck, but luck is not a great long-term strategy for building wealth.
Steady-drip investing is still the best option for most people, because it gets you out of the decision-making process. You make one decision: to set up a monthly automatic withdrawal. Set it and forget it.
Steady-Drip Investing Takes Bravery
The decision to set up steady-drip investing takes courage, because there’s no immediate payoff. (Even though your future self thanks you immediately.)
Like watering seeds for the future harvest, steady-drip investing takes time to grow. Here’s how to set it up if you’re following our Blockchain Believer Portfolio:
1) You can use a tool like Betterment to set up an auto-withdrawal for buying the stock market (instead of picking individual stocks, try the Vanguard VTI fund, which is like buying the entire stock market).
So if you’re investing $1000 per month, you buy $900 in stocks using Betterment, and $100 in crypto using Coinbase. If you’re investing $100 per month, it’s $90 and $10. It’s that simple.
Here’s the thing that the academics overlook: the lowest investment is no investment. And that’s what happens for most people: we get busy, we get distracted, we spend our money on frivolous things. You have to invest money to make money.
This decision to invest takes bravery. You have to be willing to look foolish, to occasionally make wrong decisions, to lose some money. You have to be willing to endure the eye-rolling and the I-told-you-sos of the crypto skeptics.
Unless you were born rich, then bravery is a prerequisite for building wealth. Starting a new business, asking for a raise, going back to school: these things all take bravery. But when they pay off, they pay off big.
We’ve been releasing a podcast series called “Investor Mindset,” designed to hack your brain into a wealth-building machine. Think of them like guided meditations, planting the seeds of financial success: like steady-drip investing for your mind.
The latest episode will help you develop the investing virtue of Bravery. Paid subscribers can download it here.
Sir John Hargrave is the publisher of Bitcoin Market Journal. Sign up for our free newsletter and get his investor column every Friday.