Is it time to buy the dip?
How to Spot the Bottom
Buying the bottom is overrated. It's hard to do because trends (both up- and down-trends) are so powerful in crypto. Prices go up higher than you think they will and keep going up for longer than you think they will, and they go down lower than you think they will and stay down for longer than you think.
If you're wrong about where the bottom is (it's likely that you will be), and you don't have a stop loss in place, your investment can lose a lot of value and be stuck underwater for months or even years.
That's why I spend the vast majority of my time and capital on spotting and riding uptrends.
That being said, occasionally there are such strong signals that it's a good opportunity to buy the dip that it's worth the risk.
If you have a long time-horizon, your prize target is high enough, and you're approximately right about where the bottom is, you'll still make a bunch of money even if you don't buy the exact bottom. In these cases, your stop-loss can be lower while you still have a reasonable risk to reward ratio. In other words, you can afford for your investment to go down further in the short-term if it's likely to go up much higher longer-term.
I bought the dips in January and June of this year because I got strong signals that this was an unusually good risk to reward opportunity. It turned out that those were not bear market lows, but I did profit from those trades. When the bounces did not turn into higher time-frame uptrends, and we started selling off, I took profits.
So is now a good time to buy the dip? Is the bear market bottom in? I'll break down the three criteria I use to make my crypto trading and investing decisions, and then focus on sentiment as a way to spot bottoms.
How I Make Crypto Investing Decisions
I make decisions based on three criteria: technical analysis (price charts), market sentiment, and fundamental analysis. I weight them in that order. For example, if I think the fundamentals of a given crypto are good but the chart is not, I do not buy. Here's a quick breakdown of each of these three forms of analysis.
1/Technicals
I look at price charts to determine if/where people are buying and selling. Specifically, I look at the monthly chart to find the high-level trend or range, the weekly chart for medium-term buy and sell opportunities, and the daily chart for specific entries, exits, and stop losses. Within those charts, I use horizontals to identify points of demand and supply.
2/Sentiment
Analyzing market sentiment is more art than science. It's subjective. You have to rely on anecdotal data and use intuition. That being said, having been in crypto for over seven years, I've honed my ability to gather and interpret market sentiment and I trust my intuition. Sentiment is a countersignal. You're bullish when the consensus is bearish, and you're bearish when the consensus is bullish.
3/Fundamentals
Fundamental analysis entails evaluating the intrinsic value of an asset and factors that could influence its price in the future. I used fundamental analysis to determine that I want to be in crypto long term. I came to the conclusion that the world needs an open-source, fixed supply currency that anyone in the world can transact nearly instantly, at almost no cost, and without reliance on third parties.
I keep fundamental analysis in the back of my mind, but I don't use it for day-to-day trading or investing decisions. I believe that the broader market's perception of the fundamentals is more important than my own because other investors have more influence on price than I do. I operate from the assumption that the market's perception of the fundamentals is baked into the price charts.
What is the Sentiment Now?
Crypto's volatility is absolutely brutal. It causes extreme fear and extreme greed. Counterintuitively, extreme fear often marks bottoms. Everyone who was going to sell sells. There isn't any sell-side supply left. Only demand. With the market in shock and denial, prices start to go back up, inflicting pain on those who capitulated at the bottom.
Here are some of the bottom signals that I've picked up from past bear markets:
No-coiners come out of the woodwork to dunk on people who lost money
"Crypto is Dead" stories are all over the news
Crypto Twitter finally stops FOMO-ing shitcoins and turns back into Bitcoin maxis
The "buy the dip", "diamond hands" crowd goes silent
Very few people are bullish and they're smart money
Bad news stops totally wrecking price
The consensus is much lower price targets
Get-rich-quick people leave the space, those with long-term conviction stick around
After the horrible news about FTX's collapse, sentiment became extremely bearish. Many of the above signals hit. Heiro Capital has an amazing thread on Twitter with specific instances of many of these signals which you can read here.
People who didn't want to sell were forced to sell because FTX sold it for them or lost it. Now, they can't buy the dip (the dip that FTX caused) because they don't have capital.
Investors get greedy for higher prices in bull markets and greedy for lower prices in bear markets. Now it seems like everyone is calling for lower prices (except for a couple sharp investors). That makes the contrarian in me think that we won't get to prices that low.
Technicals are Still High Time-Frame Bearish
Like I said, I weight technical analysis higher than any other variable in my decision-making process. The specific technical indicator that I weight higher than any other for major, long-term positions is the trend of the monthly chart. That trend is currently down. Therefore, I'm not willing to put any significant amount of capital to work on the buy-side.
The counter argument is that the next level of support is only about 10% lower. If you have a long time-horizon, and a high price target, buying a bit here seems totally reasonable given how bad sentiment is right now. You're going to have pretty good returns if you're right, even if you don't buy the exact bottom, and/or if it takes a while before we start the next bull run.
On the weekly chart, this week's candle is somehow green despite all the bad news and bearish sentiment. It's a good sign when news and sentiment is bad, but the market isn't dumping.
Summing It Up
Here's where I stand based on my three criteria:
Technicals: Bearish. Monthly downtrend, weekly downtrend, not at key support level yet.
Sentiment: Bullish. Almost everyone is afraid and looking for lower prices.
Fundamentals: Bearish. Quantitative tightening, retail has less disposable income because of inflation, institutional demand is lower because of lost trust, contagion caused by 3AC, Luna, and FTX means less liquidity and ability to leverage long.
My signals are conflicting at the moment. My intuition is telling me to buy but my charts are telling me to wait, so I'm waiting on the sidelines for now.
If something really bad happens with Genesis/Digital Currency Group/Grayscale/GBTC, all bets are off.