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Published: Feb 04, 2022 5 min read
Collage of a hand holding a smart phone with a red button that says  Buy / Sell  Bitcoin and a negative stock chart in the background
Money; Getty Images

"Buy the dip" has long been a rallying cry for Bitcoin investors. But in the latest sell off, even many seasoned cryptocurrency experts are warning against the strategy — unless you are willing to hold on for years to come.

Over the past three months the price of Bitcoin has plummeted more than 40% from its record November high, amid relentless selling. For some other cryptocurrencies, the losses have been even deeper.

Technical analysts, who study price chart patterns to make market predictions, say other assets that have sustained price crashes of this magnitude often flatline for months or years afterwards. They fear Bitcoin may return to the “crypto winter” pattern of 2018 to 2020, when a long-term chart shows a sideways drift between $4,000 and $10,000.

The upshot is that even the famously bullish crypto crowd is cautioning novice investors about jumping into the market right now.

“My advice is DON’T do it,” said Eloisa Marchesoni, a longtime cryptocurrency investor and consultant, by WhatsApp message. She says she’s worried about both the Federal Reserve’s plan to raise interest rates and the upcoming quarterly expiration of Bitcoin futures contracts in late April, both of which could send Bitcoin prices even further south.

Institutional investors often use derivatives markets to hedge exposure to assets like stocks or Bitcoin. This means, around derivatives' expiration dates, there’s often volatility as hedges are adjusted or positions closed.

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Where is Bitcoin's price headed?

Bitcoin, cryptocurrencies and related blockchain technology are not dead, any more than the Internet was dead after the dot-com bubble popped, according to crypto advocates. In fact, there’s a “brain drain” from major tech employers and banks into the cryptocurrency world, says Eli Ndinga, head of research at cryptocurrency investment firm 21Shares.

If the long-term looks rosy for cryptocurrencies, however, the short-term looks volatile. Currently, seven out of 10 bitcoin investors are underwater, according to Ndinga, whose firm uses the transparency of the blockchain, with its unique Bitcoin addresses to track the performance of all Bitcoin investments, albeit anonymously.

Historically, what market watchers call “capitulation” — the final, cathartic selloff that marks the definitive end of a bear market — occurs when that ratio rises even further to more than eight out of 10, Ndinga says.

The reason: Investors frequently consider bailing out of rocky markets when their initial stake seems threatened. In a bear market, that feeling can build on itself, with ever-widening losses striking fear into the hearts of more and more investors. Eventually, everyone who is liable to do so has given in to panic selling — capitulation.

“Probably look at a five- to 10-year time horizon for holding,” says Daniel Polotsky, founder of Bitcoin ATM and financial services firm CoinFlip. “If you believe in the project over that timeline, embrace opportunities when it’s on sale.”

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Fewer Bitcoin Investors

To be sure, some cryptocurrency investors are sticking to the “buy the dip” playbook.

“Remember when #Bitcoin was $60,000+ and you felt like you didn't own enough?” tweeted crypto investor, Mike Alfred recently. “You promised yourself you would never be that underexposed ever again. Well, now is when you start keeping your promises.”

Speculators, even those making promises on Twitter, are notoriously fickle, however. There are many signs that the "fear of missing out" that fueled the speculative boom in cryptocurrencies disappeared with the Federal Reserve's easy-money policies.

Volumes on futures markets, where institutional investors place speculative bets, are way down from 2021 peaks, with the notional value of all futures traded at $1.51 trillion in January, down about 38% from $2.42 trillion in May 2021. On the flip side, there is little sign on charts that bulls have any appetite for sustained buying, says technical analyst Mark Arbeter.

Most strategists say there's no reason to rush back to buying cryptocurrencies.

The time in crypto to “make money quick” may have passed, says Polotsky, advising those who are still interested in the area to settle for “making money slow.”

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