You may have heard the term “redeem the fall” or “redeem the drawdown”. After cryptocurrencies became popular, their prices soared, which created a strong upward trend. Some traders may suffer from “lost profit syndrome”, and may decide to buy even at the highest prices. However, the fall buyback allows traders to use any correction to buy bitcoins at a low price.
Even a small drop can easily lead to a major collapse of the bitcoin market. Bitcoin has been crashing, with declines of 75% in the past. This is why the “fall buyback” is a controversial strategy in stock trading. Will the Buy the Dip strategy suit you? Let’s take a closer look at the topic and find out.
How do you “redeem the fall”?
A “fall buyback” is the purchase of a financial asset when it has fallen in value. When a market is in a long-term, stable uptrend, a drop in prices makes it possible to buy stocks or coins at a reduced price. As a result, when the market rises to new highs, it will be easier to sell the stocks or coins, thus increasing future profits.
The fall buyback is a universal trading strategy and is suitable for most financial assets on the stock exchange or cryptocurrency markets. Especially when trading bitcoin, it is popular because the trends are usually very long and strong, and that makes it hard for traders to catch a good moment, resulting in them buying at high prices. If you wait for the correction, you will get more coins for the same amount of money.
It’s possible to redeem the fall in any market – in stocks, commodities, futures, forex, and cryptocurrencies. However, you’re going to have to use a different approach if you’re buying cryptocurrencies.
Trends and volatility in the crypto market tend to be bigger than traditional markets. Therefore, the correction in cryptocurrencies may be bigger.
If you take bitcoin in 2021, the price started with double growth. Then as the price continued to rise, the corrective drawdowns were relatively small – from 18% to 31%. In the summer of 2021, it reached the level of 64 thousand dollars. Then a serious collapse began, which led to a correction of 55%.
It’s important to note that buying out cryptocurrencies on a drawdown can lead to a price collapse. You can buy on a 20% correction, and discover that the cryptocurrency market collapsed by more than 50%. Long-term investors (hodlers) are using fall buybacks to accumulate cryptocurrencies at an early stage of adoption. They explain this by saying that if the price rises significantly, their accumulated coins will bring them incredible wealth.
What causes Bitcoin to fall?
Bitcoin’s price might fall for many reasons. It could be political instability, new laws, or society’s influence.
For example, changes in the global economy may reduce investment in bitcoins. The 2020 global pandemic slowed down trade, which suspended business and economic activity. Since people were unsure about their futures and worried about losing their jobs, they started to withdraw their investments in anticipation of lower prices.
The new in 2021 was that China took strict measures against bitcoin miners, banning them from doing business in the country. Most bitcoin nodes were forced to close or move to another location, which reduced the security of the bitcoin network with a decrease in the number of validator nodes.
It is possible for an asset to be overbought and profit-taking to be underway. Technical indicators are used by traders to determine the probability of a price correction. A bearish divergence can be determined with the help of technical tools.
After a long uptrend, bitcoin began to show a technical price divergence. High price highs continued to form, and the Relative Strength Index (RSI) indicator showed a decrease in the highs. After a long uptrend, divergence on the RSI can indicate an approaching price adjustment, and a trader buying a drawdown may notice this and wait until the price drops and buy back even more coins.
The event of FUD is an acronym that describes “fear, uncertainty and doubt” in the cryptocurrency world. Many people still don’t see the point in investing in cryptocurrencies because there isn’t a time-tested cash flow or a way to evaluate crypto networks. As a result, FUD appears, which leads to investors reconsidering their decisions and even thinking about selling their bitcoins.
Can you redeem the drawdown on altcoins?
Drawdown redemptions can work very well with some altcoins. This tactic works best with large altcoins that are in the top 20 by market capitalization. This is because there are enough buyers and sellers on the market at the same time, which forms major price trends.
Generally speaking, altcoins with a smaller market capitalization are more likely to have a bad experience. Smaller altcoins are at a higher risk of fraud and manipulation, which is why their prices are more volatile. The price of a small altcoin might fall and never rise again, so investors should be careful and not spend too much money on them.
How are Catch a Falling Knife and Buy the Dip different?
It’s the evil twin brother of “Buy the Dip”. The term “falling knife” (eng. falling knife) is used by traders during a stock market decline to indicate that it won’t stop anytime soon.
Suppose the “knife” is falling from its historical maximum. If you try to catch him, you will seriously cut yourself. Of course, you can catch a knife without hurting yourself, but are you willing to take such a risk?
It always happens like this. Traders see low prices and decide to buy, then they wait for a rebound. But this rebound may take months or even years.
People who saw the crash of 2018 know what I’m talking about. Then there was an 11-month bear market, and the price fell 85%.
Buying a drawdown differs from catching a falling knife in that a drawdown is usually relatively small and falls within a bigger trend. Corrections of 20-40% aren’t uncommon in cryptocurrencies.
Falling knives happen when the market collapses and the price drops rapidly and low.
Is it worth buying back Bitcoin when it falls?
The phrase “buy on a drawdown” is just a popular expression. Traders need to turn it into a strategy like the one we described above. Therefore, to purchase on a drawdown successfully, you need technical analysis.
Along with the strategies listed above, your strategy needs to be strong if you want to recover from a slight drop. If the trend is strong, the price may recover after a slight drop. If the trend is not strong enough, then the strategy becomes riskier because, after a drawdown, the price may not return to the previous values.
You’ll fall into a bull trap if you buy a drawdown in a downtrend.
Is dollar value averaging better?
You can buy bitcoin worth $500 every first Friday of the month if you do dollar value averaging.
Different from Dollar Value Averaging (DCA), a drawdown redemption depends entirely on the bitcoin price and requires the trader to calculate the beginning of a new bull run. On the other hand, DCA is predetermined, regardless of the bitcoin price.
Because of this, when using DCA or buying a drawdown, take into account your ability to read technical analysis and the moment of bullish reversals. DCA does not require any special skills, you just need a calendar to plan your purchases. To buy a drawdown, you need to understand technical analysis, and the ability to apply it.
Think about a DCA suitable for novice traders if you need more practice picking entry times.
Redeeming bitcoins is getting less risky
When a trader decides to take on a drawdown redemption strategy, he has to take on several risks.
The risks come from analysis errors. There are certain market conditions where buybacks are more effective. If a trader gets his market conditions wrong, he’s most likely to lose money.
Traders who want to buy on a drawdown need to develop a strategy with clear rules so that they know for sure exactly when to take a position. If they don’t have rules or they don’t follow them, there’s a greater chance of losing.
Because cryptocurrencies are volatile, it can be difficult to distinguish a small drop from a serious fall. If such a scenario happens, then buying too early can lead to big losses for the trader. Over the past decade, bitcoin has experienced corrections ranging up to 75%.
Let’s sum it up
Traders are increasingly turning to drawdown buybacks in order to earn and make a profit. By itself, a drawdown buyback isn’t a strategy to earn and make a profit, so it is important for traders to set rules for buying and selling with minor price fluctuations.
When buying a drawdown, a trader should consider current market conditions. However, an unexpected collapse in prices can hit the wallet hard. As with any other strategy, it is better to redeem a drawdown after a thorough technical analysis and market study.