Here's Why Bitcoin's Next Big Move Could Redefine Your Investment Strategy | The Motley Fool (2024)

After hitting a new all-time high of $73,750 in mid-March, Bitcoin (BTC -2.93%) has struggled mightily. The world's most popular cryptocurrency recently dipped below the $54,000 level although it has since recouped some of the losses. As a result, some crypto investors are starting to abandon Bitcoin and look for better investment options elsewhere.

But I think that would be a mistake. Abandoning a long-term investment strategy after just a few months of poor performance could prevent investors from participating in Bitcoin's next big move. Time and time again, a buy-the-dip strategy has worked with Bitcoin, and this is shaping up to be yet another opportunity.

Bitcoin's historical track record

Bitcoin is now trading more than 10% below an all-time high set in March. For traditional equities, that would be awful. But the size of this decline is actually negligible compared to the size of Bitcoin's previous declines.

Cathie Wood of Ark Invest analyzed Bitcoin's price performance and found at least five different periods when Bitcoin had plunges of 75% or more. The latest occurred in the period from November 2021 to November 2022, when Bitcoin lost nearly 77% of its value. After hitting a then all-time high of $69,000, Bitcoin dipped to as low as $15,797.

If you had given up on Bitcoin in 2022, you would have missed out entirely on Bitcoin's rapid ascent back to the $69,000 level. And that's a pattern that has repeated, again and again, throughout Bitcoin's history. So don't be afraid of a dip right now. If anything, this discounted price for Bitcoin simply presents yet another buying opportunity.

As Cathie Wood notes, despite severe declines during the past decade, Bitcoin has outperformed every major asset class over longer-term time horizons. As a rule of thumb, you'll need to hold Bitcoin for at least three to four years to participate in those gains.

There's even more cause for optimism when it comes to Bitcoin beyond just previous price performance. Many of the factors that led to Bitcoin's recent slide are either technical factors related to supply and demand, or investor concerns about the broader macroeconomic situation. In short, investors are not changing their minds about Bitcoin and its long-term outlook. Nothing fundamentally has changed with Bitcoin itself.

Case in point: Investor inflows into the new spot Bitcoin exchange-traded funds (ETFs) are returning to previous levels. After a brief downturn in May and June, inflows are resuming in July. On the first day back from the long July Fourth holiday weekend, inflows into the new spot Bitcoin ETFs were $300 million. A single Bitcoin ETF -- the iShares Bitcoin Trust (IBIT 2.38%) -- alone accounted for $180 million in inflows.

How much Bitcoin should you add to your portfolio?

Of course, there's a chance that this dip could be different from all other previous Bitcoin dips. Maybe this dip is the beginning of something more permanent instead of temporary. After all, past performance is no guarantee of future results, and maybe Bitcoin won't bounce back as expected.

But that's unlikely to be the case, given how much more support there is for Bitcoin among institutional investors right now. During previous Bitcoin plunges, the crypto market didn't have demand from the spot Bitcoin ETFs to soak up excess selling pressure. And yet Bitcoin still recovered every time.

So now might be the time to rethink the optimal Bitcoin allocation mix for your portfolio. The higher your allocation now, the more you will be positioned to benefit from Bitcoin's next big move. As a general rule of thumb, a 1% allocation to Bitcoin is conservative, while an allocation of 3% to 5% is more aggressive.

Buy the dip is an investment strategy that has paid off handsomely for more than a decade for Bitcoin investors. Even with severe declines, Bitcoin has always bounced back. The hope now is that the same pattern is about to repeat itself yet again.