Bitcoin and Ethereum have shown the ability to bounce back from market sell-offs. Can they do it again?
After every crypto market sell-off, a popular strategy has been to “buy the dip.” As prices fall, many cryptocurrencies suddenly look undervalued, and hence, much more appealing to investors with an eye on the long term.
But there’s just one problem: This strategy does not work with every cryptocurrency. The key is to find cryptocurrencies with long-term staying power and a demonstrated track record of bouncing back from adversity. With that in mind, the two cryptocurrencies at the top of my list are Bitcoin (BTC -1.52%) and Ethereum (ETH -2.30%).
1. Bitcoin
The priority investment is Bitcoin, because this cryptocurrency has shown the greatest potential to bounce back from a sell-off. Time and time again, Bitcoin has collapsed in value, only to bounce back bigger and better than before.
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In 2023, Cathie Wood of Ark Invest analyzed the historical track record of Bitcoin, to see whether there was any validity to the “buy the dip” strategy for Bitcoin. Her findings certainly did not disappoint. She found that there were five times in the history of Bitcoin when its price collapsed by 77% or more. Each time, Bitcoin bounced back to hit new highs.
Take the most recent drawdown, which occurred after Bitcoin reached a (then) all-time high of $69,000 in November 2021. Bitcoin proceeded to collapse in value by 77%, and many doomsayers said that was the end of the cryptocurrency. But guess what? Bitcoin promptly rallied in 2023, gaining more than 150% in value. Bitcoin continued to gain in early 2024, reaching a new all-time high of $73,750.
Given that historical context, the recent August sell-off, in which Bitcoin lost 28% of its value almost overnight, is hardly calamitous. And, as expected, in August many longtime Bitcoin investors did what they’ve always done: They bought the dip. As a result, Bitcoin has now stabilized around $60,000.
2. Ethereum
Similar to Bitcoin, Ethereum also has a long track record of bouncing back from adversity. If you look at a long-term price chart of Ethereum dating back to its launch in 2015, you’ll see a surprising number of steep peaks and valleys. For example, in 2018, Ethereum fell from $1,400 to $400 in a matter of just months. And in 2021, Ethereum collapsed in value by nearly 50% before rallying to a new all-time high by the end of the year.
The key to Ethereum’s staying power has been its diversified blockchain ecosystem. Ethereum is more than just a digital currency used to transact goods and services. It’s also a blockchain network that developers can build on top of to create anything from apps to tokens to decentralized marketplaces. As a result, Ethereum has an established presence in nearly every sector of the blockchain world. This helps to diversify away risk in the event of a market sell-off.
That being said, Bitcoin is a clear priority over Ethereum if you’re looking to buy the dip. For one, Bitcoin’s recovery period is usually much faster than Ethereum’s. And, as noted above, Bitcoin tends to reach a new all-time high after a major sell-off. That’s not necessarily the case with Ethereum, which is still looking to rebound from an all-time high of $4,891 in 2021.
What’s past is prologue?
The one caveat here is that past performance is no guarantee of future performance. In other words, there is no iron law of finance that says an asset — especially not a digital asset — must rebound in price after a market sell-off. The ability of Bitcoin and Ethereum to bounce back so many times over the past decade could just be a coincidence. Perhaps it’s just a bizarre statistical anomaly, along the lines of the January Effect in the stock market.
But I don’t think so. What’s different this time around are the new spot ETFs for Bitcoin and Ethereum. These will help provide a floor to the prices of these two cryptocurrencies, and help mitigate any downward selling pressure. As long as investor inflows into the new spot ETFs for Bitcoin and Ethereum show signs of recovering, this could very likely be yet another opportunity to buy the dip in Bitcoin and Ethereum.
Dominic Basulto has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
