Bitcoin Retail Traders Are Tired of ‘Buying Down’

When Bitcoin crashed on Tuesday, El Salvador President Nayib Bukele tweeted a version of the three words that have become a mantra for meme stock traders: Buy the drop.

Last year, those three words bounced around on social media every time a meme item dropped. AMC stocks in free fall? “Buy the fall,” insist the redditors. Fall of cryptocurrencies? A multitude of tweets saying “buy in the fall”. Is a celebrity PSPC collapsing? Telegram groups are filled with messages from hopeful buyers.

This is not a new concept: When others panic and sell, causing prices to drop, bullish investors say it’s a good time to buy stocks at a low price.. The phrase has become a rallying cry in times of pandemic volatility, particularly in weeks like this, when Bitcoin, for example, plunged as much as 17% in a matter of minutes, hitting an all-time low in one. month.

It requires a level of faith that the asset, whatever it is, will revert to a higher level.

“The markets have been going up for so long and people have made so much money, and retail investors don’t want to be left behind,” said Sara Rajo-Miller, investment advisor at Miracle Mile Advisors. “There’s that sense of community with Twitter and social media, where we can educate each other. We have literally seen stock prices go up in some cases. “

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Tuesday, El Salvador became the first country to adopt bitcoin as legal tender. This was to be a potential tipping point for the massification of crypto assets. But instead of going up bitcoin fell, falling to $ 43,050.

It was then that Bukele used the expression. “Buy fall,” he tweeted, with a blinking face emoji.

Announced that the country increased its total bitcoin holdings to 550, which equates to roughly $ 25 million worth of cryptocurrency, although it changes from minute to minute, of course. The volatility has been validation for those who have said that bitcoin should not be used as a currency.

But the “buy the dip” orthodoxy has started to upset some retail operators.

Ashley Duncan, for example, is fed up.

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This 29-year-old retail investor from Dallas says she is a “gamer at heart” who has made thousands of dollars in the cryptocurrency space. Corn After seeing the price of bitcoin, ether, dogecoin and other memes assets plummet in recent months, Duncan said he now swears “hodl for life.” (Hodl: internet slang to maintain a long term investment).

Part of his view comes from a loss of $ 2,000 on a cryptocurrency token called “Trustworthy and Reliable Intelligent Autonomous Systems” (or Trias for short). He bought in May, as the token fell from a high of over $ 30. It came in at $ 19, but saw the decline continue. Now, Trias costs less than US $ 9 in the market.

Duncan believes that much of the hype about “buying the scraps” is nothing more than hype. which ignores a crucial reality of investing: “With any investment, it’s dangerous,” he said. “You cannot keep giving all your money and ruining yourself for a risky future.”

Don’t expect to hear such opinions often on social media. It’s easy to talk publicly about making money or telling people that a stock is going to go up (even if it isn’t). It is much harder to talk about losing money.

In light of all the hubbub of “buying the downside,” this year’s profits and losses, two professors wanted to know if the strategy was helping or hurting investors.

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So, Thomas Shohfi of Rensselaer Polytechnic Institute and Majeed Simaan of Stevens Institute of Technology investigated two different investment cases: an investor who has a lump sum that will be invested over time, and another who receives a fixed amount of money. money every month to invest. They simulated how each strategy would “buy the down” with four different starting periods: two at the start of bull markets in January 1994 and January 2010, and two at the start of bear markets in January 2000 and January 2008.

What they discovered in an article published this year is that Buying on dips can help improve traders’ risk-adjusted returns – or the return that an investment generates over a specific time period relative to the risk involved – but not necessarily their wealth over time.. Additionally, the strategy can help an investor deal with the ups and downs of the market, but it has a trade-off: money that sits on the sidelines while waiting to be invested in those lows. During the time that the money is not invested in the market, it does not increase, since the interest rates are almost zero.

“There is always an opportunity cost,” said Simaan. “By sitting on the side, you are missing out on this opportunity.”

If buying on the downside reminds investors to regularly place money in the market, it could help them in the long run.because the stock market tends to reliably rise over time. The key is not to invest too much money all at once and be aware that some declines may continue for longer than expected.

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“If you buy the dip and go down, and you buy the dip and go down, and you’re frustrated because you don’t hit the bottom, you’re like, why am I doing this?” I keep losing more money, ”said Shohfi.

For Dan Egan, managing director of behavioral finance and investing at roboadvisor Betterment, the idea of ​​buying on the downside may make new investors feel more confident in putting their money in the market.

“If that’s what makes people comfortable with investing, go for it. But what concerns me is that if there is a trough which is a downturn, people might feel like they bought the trough and keep going down, maybe buying the trough is not as good as it is claimed“He said.” But there is camaraderie in buying fall. “

For an example of how buying on the downside can increase – or weigh – returns, take a look at Cathie Wood’s ARK Innovation (ARKK) ETF. If you had bought ARKK shares in the March 2020 crash and held them until now, they would be worth 250% more. But let’s say you heard the buzz around Wood and his success in mid-February 2021 and decided to buy. Now it would have a 20% decrease.

Now consider that you saw the ARKK price drop from its all-time high in mid-February and tried to buy the down on February 22. It turns out the decline had a long way to go: these stocks would now be worth around 13% less.

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In the case of bitcoins it is also a question of time. If you had bought during the mid-January dip, your stocks would have risen more than 100% in April, before dropping 40% in early August.

Corn If you bought during the cryptocurrency crash on July 20, those holdings would have made double-digit gains.

“The likelihood of success comes and goes,” said Scott Knapp, chief market strategist at CUNA Mutual Group. “There is a lot of uncertainty associated with the downside buying strategy. It is really the conditions of the moment which mark the probabilities ”.

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