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Should You Buy the Crypto Dip? 3 Questions to Ask Yourself First

The Motley Fool
The Motley Fool
 2022-01-19

After reaching record highs late last year, cryptocurrency prices have taken a beating over the last couple of months. Bitcoin (CRYPTO: BTC) is down 37% since its peak in mid-November, and Ethereum (CRYPTO: ETH) has fallen roughly 32% from its high.

While this type of volatility can be unnerving, many of those who are bullish on crypto are taking this as an opportunity to stock up while prices are lower. If prices end up surging again within the next few weeks or months, it's possible to earn significant returns by investing now.

That said, crypto isn't right for everyone. Before you buy, be sure to ask yourself a few questions to decide whether now is the right time to invest.

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Image source: Getty Images.

1. How high is your risk tolerance?

The crypto market, in general, has experienced explosive growth over the past year. Cryptocurrency is still highly speculative, though, so even if prices do recover in the short term, there are no guarantees that this type of growth will continue over the long run.

It's possible to make a lot of money by investing in crypto, but there is also a possibility that you could lose your entire investment. If you have a high tolerance for risk, investing now may be a smart move. But if you're not willing to take that risk or if you can't afford to lose any money right now, you may be better off avoiding crypto.

2. Can you handle a significant amount of volatility?

There's a good chance that the biggest cryptocurrencies, such as Bitcoin and Ethereum, will recover from this most recent downturn. But it's almost certain that there will be more downturns like this in the future , and some could be even more severe.

Even the most stable cryptocurrencies have experienced intense volatility in the past. Bitcoin has lost more than 80% of its value on multiple occasions over the years, for example. And throughout the course of 2018, the price of Ethereum fell by close to 95%.

Of course, both of these cryptocurrencies managed to recover from those downturns and soar to new heights. But even if they do thrive over the long term, be prepared to weather some severe storms along the way.

3. Are you willing to hold your investments for the long term?

One thing to keep in mind when investing in crypto is that it isn't a "get rich quick" tactic. While it's not impossible to make a substantial amount of money in the short term, it is extremely difficult to time the market effectively and buy and sell at just the right moments.

The best way to make money with crypto is to hold your investments for the long term -- meaning several years, if not decades. Prices may experience significant ups and downs over the short term, but as long as average returns increase over time, you'll make a profit over the long run.

There are never any guarantees when it comes to investing, and this is especially true for crypto. While cryptocurrency does have a lot of potential, it is a high-risk investment. If you're willing to take that risk for the potentially substantial rewards, it may be the right investment for you. Otherwise, you may be better off investing elsewhere for now.

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Katie Brockman owns Bitcoin and Ethereum. The Motley Fool owns and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy .

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