I have been trying to put the relationship between Bitcoin and Altcoins into perspective for new Digital Currency investors, but even now, nearly a year after buying my first non-Bitcoin Altcoin, I have not really grasped all of the complexities. Perhaps at no time in recent history have two such volatile assets been so intimately tied in value.
Below I want to compare the three options you have for each Altcoin investment at any time. Option one would be to sell for dollars, or whatever your fiat currency is. Option two is to sell for Bitcoin. Option three is to hold (or HODL, whichever you prefer). There is some basic math below, but I tried to keep it simple and define each scenario for you.
In October 2016, Bitcoin started the move from around $600 to $1000 USD by the end of the year… a 60% increase. This devastated the ‘ratio’ between Bitcoin and other digital currencies, but did not have a great impact on the actual dollar value. It is important to understand this, so here is an example.
The price of Litecoin in Bitcoin terms on October 1st was approximately 630000 sats (.00630000 of 1 BTC). At the end of the year, LTC was 450000 sats, a 30% decrease. Many Litecoin holders were terribly, and vocally, upset at the drop in the value of their LTC. Let’s say we own 100 LTC and do some math to calculate its value before and after the pump…
(Qty * BTC ratio) * BTC Price = October LTC USD Value
(100 * .0063) * $600 = $378
End of Year LTC USD Value
(100 * .0045) * $1000 = $450
100 LTC at the end of the year, even though it was only worth 450000 sats, was worth $72 more in USD. This is a 20% increase in fiat value. This is the obvious sell for BTC side of the trade, and while I expect there was a lot of whining in all of the chat rooms, my thought was the complaining was being done by people who had not seen the basic math above.
This calculation was the theme of an earlier article I wrote. At the time, to a new trader such as myself, it seemed like a revelation and I wanted to explain it to the complainers and tell them to get over it. It turns out I was the one being short sighted though. I was only calculating the obvious side… the Hold side. I neglected to take the less evident aspect of the trade into account. I forgot to ask, “What would the profit look like if I had sold my Altcoins (LTC in this case) for BTC instead of holding?”
Let’s again do the math…
(Qty * BTC ratio) = BTC value of 100 LTC October 1st
(100 * .00630000) = .63 BTC
I guess that is pretty obvious after the first calculation. If I sold 100 LTC October 1st, I would have .63 BTC, which is still worth $378, just like it was above (.63 * $600). What would this be worth at the end of the year?
(BTC Qty * EoY BTC Price) = End of Year BTC USD Value
(.63 * $1000) = $630
Simply stated, the loss by holding our LTC is not actually a loss of fiat value. Remember, we gained 20% by holding. The loss is the difference in profit between the value of holding and the value of selling on October 1st.
End of Year Value of Holding 100 LTC = $450
End of Year Value of .63 BTC (Selling LTC October 1st) = $630
Difference = ($630 – $450) = $180
The conclusion based on those numbers is there actually is a loss of $180 by holding versus selling. Talk about confusing. If you do not sell, you gain. If you do sell you gain more. The only way you do not gain is by converting your BTC back to dollars on October 1st before the rise in the price of Bitcoin. The three scenarios you have to consider (not just for this example, but for each trade in Crypto) are:
- Sell LTC for USD October 1st ($378 at end of the year / $0 gain)
- Hold LTC until the end of the year ($450 at end of the year / $72 gain)
- Sell LTC and hold BTC until the end of the year ($680 at end of year / $302 gain)
So, I guess the people holding and watching the price of LTC drop versus Bitcoin do have something to cry about. There was a better option, but c’mon man! You gained 20% in three months. What other investment has that kind of return?
Only in crypto do we see such madness. The real takeaway from all this is Bitcoin price controls the value of all other digital currencies. When Bitcoin is on the rise, it is where you want to be. In reality, it is just another currency… by far the biggest, but just a currency. You should treat it as such. Just like the others it can go up 100% in a few days. Selling your other alts for Bitcoin when it is going up is an option you should always take seriously, but many people feel they need to be 100% in alts at all times. I tried that. It does not end up well when Bitcoin is increasing.
My advice: Don’t be too attached to your Altcoin investments. You need to remember Bitcoin is a Digital Currency as well, and be prepared to accept it as your best option to profit. I am sure you have seen the projections by people saying Bitcoin will explode in value. It makes sense to have some of your Crypto Investments in Bitcoin to take advantage of this if it happens, don’t you think?
A friend of mine reminded me the other day, if you own 21 Bitcoins, only one million of the over eight billion people on the planet could ever have as much as you. What happens if just .1% of those eight billion people decide to buy Bitcoins? The price will multiply many times over. I believe we are fortunate to already be here to take advantage of it.
My Bitcoin Address: 1EPyFDbRtfxMvpAhCyXBH2xwMuJ77Wwb41