In the 4th Quarter of 2016 the price of Bitcoin went from $600 USD to $1000 USD; a 65% increase in price. During this time I learned three important lessons as a Crypto trader. In life we often learn the hard way by experiencing unpleasantness, but we also have the ability to learn from others who have already experienced the pain and can avoid the same mistakes.
I have talked to a few experienced traders who also went through the same Bitcoin price boom and corresponding Alt decline. Some are convinced it is not going to happen again because there is so much money coming into Crypto at the moment it can sustain an increase in price for BTC and everything else. I don’t think this is true. In my opinion, it is only a matter of time before Bitcoin goes way up in price again. This leads me to the first lesson I learned:
- Every other Alt is measured against the price of Bitcoin.
We all know this, but read a bit further and make sure you understand the next sentence when you are done reading. When the ‘fiat price’ of Bitcoin goes up, it results in the ‘Bitcoin Ratio’ of Alts going down. Make sure you understand these are two different things. The ‘Bitcoin Ratio’ is the small portions of BTC called ‘sats’ every Altcoin is measured in. The ‘fiat price’ of an Alt can be calculated by taking the ‘Bitcoin Ratio’ and applying the conversion to your local currency.
The fiat price of Alts does not necessarily go down when Bitcoin surges. If the Bitcoin fiat price doubles and the Litecoin ratio drops by 50%, Litecoin is still worth the same Price in fiat terms… even though the Bitcoin Ratio is way down. While it is possible for the fiat price of Litecoin to change, the fiat price of Bitcoin should not actually change the fiat price of Litecoin. Yes, I know it will, but it shouldn’t. For the purposes of my points below I just want you to understand the Price and Ratio are two different numbers.
BTC Price = $500 USD
LTC Ratio = .062
LTC Price = $31 USD
BTC Price = $1000
LTC Ratio = .031
LTC Price = $31 USD
- You do not want to be 100% in Alts when the Bitcoin Price surges and the Altcoin Ratio declines.
The previous illustration showed the price of Litecoin staying the same from October to December. The numbers I used are fictitious, but reality is similar to the example. Our goal is not to maintain the current value of our portfolio, we want to increase it, and one obvious way to do this in the scenario above is to be in BTC instead of LTC.
When deciding which Altcoin to invest in, remember keeping your money in Bitcoin is always an option. Bitcoin is just a big Altcoin itself. It might be more fun to buy and sell Alts, but I am personally not here to have fun (well, maybe a little). I keep score by looking at the value of my portfolio, and often being in Bitcoin is the best way to insure profits.
If I sold my 1 LTC on October 1st in the example above and held .062 BTC instead, on December 1st the fiat Price of my investment is $62… twice the $31 value of 1 LTC.
- The true advantage of having your investments in BTC when the price surges is being able to take advantage of the drop in the Bitcoin Ratio in Altcoins.
On point 1 I argued if you hold Litecoin through the drop you will still have $31 worth of Litecoin at the end. On point 2, I argued if you held Bitcoin instead during the surge you will have $62, twice as much. On point 3, I want to point out the most important aspect of being in Bitcoin instead of Altcoins during a price increase.
At some point the price of Bitcoin will stop increasing and it will be time for Altcoins to shine again. When this happens, do you want to have your investment stuck in Litecoin or would you prefer to have Bitcoins available to buy discounted Alts with?
If I am holding Bitcoin on December 1st in the Bitcoin example above, and I feel like Bitcoin has stopped increasing I can choose from the discounted Altcoins to find one I feel will increase in value. If I don’t have any Bitcoin, I won’t be able to take advantage of the low Bitcoin Ratios. For example, if I have $62 in Bitcoin available, I can now buy 2 LTC at $31 each in anticipation of Litecoin increasing in value.
That is my opinion on where we want to be when the Bitcoin Price starts surging. If you believe there is so much money flowing into Digital Currencies it can sustain an increase in the price of Bitcoin and the Altcoins, then you need to understand what that really means.
If Alts & BTC are both increasing it is a double increase in the price of Altcoins. Not only are they increasing in relation to the Bitcoin Ratio, but are also increasing in Price based on Bitcoin. This is an amazing situation to be in if you can find it, but it should not be the norm.
For more analysis, including charts, please see my article titled 4th Quarter 2016 BTC Pump & Altcoin Reaction