Would XRP Be Worth Buying on a Dip?

XRP (CRYPTO: XRP) has a lot going for it, even if it isn't invincible. During the past five years, its price rose by about 750%, but if you bought the coin at the wrong time -- during several of its many deep dips -- it was still very possible to be underwater on your purchases for a couple of years.

So, is this coin an appealing candidate to buy if there's a dip in the near future, or is that the wrong strategy to use? Let's look at a few pros and cons and figure it out.

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Patience pays off, but impulsive buying can make a mess

For a cryptocurrency like XRP to be worth buying on the dip, it needs to fulfill a couple of criteria.

First, it needs to be an asset that you actually want to own because you have an investment thesis that credibly describes how the coin will gain in value over time regardless of its price on any given day and why that process is likely to continue for the next several years or longer. In the case of XRP, the investment thesis argues that the coin's utility for financial institutions is going to continue to drive more adoption and integration with the traditional financial sector because those users can't make international money transfers as quickly or as cheaply using older transfer methods. That will drive more demand for the coin and generate fees to upgrade the network.

The second criterion is that you need to be confident that whatever caused the dip did not degrade or disprove the investment thesis. For instance, if the price of XRP dipped sharply because a (purely hypothetical) new competitor called PRX one-upped it across every relevant performance metric and was rapidly stealing its share of international money transfer transactions, it would make sense to hesitate before buying. Similarly, if the coin dipped because of some sequence of events that could broadly be expected to sharply reduce the need for making international transfers of money, it wouldn't necessarily be a good move to load up on more tokens.

But checking off these two boxes alone does not guarantee that buying the dip is going to be a profitable move, either immediately or in the long term.

It's true that in the history of XRP so far, impulsively buying every major dip has eventually paid off, though sometimes only after years. It tends to be a bit uncomfortable to wait for your underwater purchases to gain enough value to turn a profit, even if it works out eventually.

Making a calculated purchase when conditions are right is a much better approach, especially if you can commit to buying at other times, too. On that note, setting up a dollar-cost averaging (DCA) strategy in which you make regular purchases regardless of the price is probably an easier way to build up a large position of XRP over time without needing to pay as much attention to the price chart. Then, if you happen to notice a dip and if your investment thesis is still holding up, you can always choose to invest a bit more without worrying too much about timing it incorrectly.

Consider your financial objectives and capabilities

The bigger context of whether to buy the dip, with XRP or any other asset, needs to be your financial goals for the investment, as well as the funds you are willing to commit to it.

Buying the dip is a strategy that is intended for long-term holding, as the only way it can be profitable for the buyer is if the asset regains at least some of the value it recently lost. For something like XRP that will generate fee revenue from transfers even if its network doesn't grow anymore, it's realistic to expect a recovery to eventually occur. It may not occur on the time scale you are hoping for, so it's important to clarify when you think you'll need the money. You'll need to keep some cash ready, not deployed into other investments, if you want to even have the opportunity to buy the dip.

That doesn't mean you should sell your house to free up capital for the purpose of buying tokens while they're a bit cheaper than normal. Nor does it mean you should dip into your emergency fund or avoid paying off your credit card. Don't even think about buying the dip with a cryptocurrency like XRP if you haven't already diversified your portfolio with other cryptocurrencies and, more importantly, more conservative investments in stocks and perhaps even bonds, depending on where you are in your investing career and what your goals for your investments are.

If you're positioned properly and have your priorities in order, it is probably a good idea to buy XRP if there's a dip. Just remember that you don't need to invest all of your spare capital at once; a dip can always get deeper and present an even juicer deal if you hold back a little bit.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends XRP. The Motley Fool has a disclosure policy.