So you must have came across this dilemma of whether to trade ALTs or not when you are shaky about BTC Price Action. Also some of you are not even clear as to how BTC price action affects ALTS...
Here is a short & quick guide:
Let’s assume you buy 1 bitcoin at 10,000$..
Now using that 1 Bitcoin you buy an ALT which is priced at 0.001 bitcoin. So now you bought 1000 ALT @ 0.001 BTC....
Now let’s assume different scenarios:
Assume after a month, your ALT has doubled & is now trading for 0.002 BTC. You decided to sell your ALT. Now you have 2 bitcoins. You decided to sell the Bitcoin back to fiat. At that stage Bitcoin price dropped from your initial purchase price of 10,000 to 9,000 USD.
You sold your 2 bitcoins for 9000 & you received 18000$ (don’t be picky & ask me exchange commissions & all that)
So essentially you achieved 100% profits in BTC terms but only 80% profits in USD terms. What that means is for every 1% drop in Bitcoin you need to make 2% profits in ALTs to stay profitable. Bitcoin lost only 10% but you lost 20% of your profits when you converted back to USD...
So in essence if you were to take a position in ALT, you need to consider what’s the potential downside risk in BTC vs potential upside in ALT. If BTC is likely to drop 20%, you will need to make 40% profits in ALTs just to breakeven at no profit no loss in fiat terms.
Now let’s look at a reverse scenario:
If your ALT drops in value after a month. This is what happens. Assume your ALT lost value from 0.001 to 0.0005
You decided to sell it and now you got 0.5 bitcoin back. Now at this time bitcoin dropped from 10,000 to 7,000
If you convert your 0.5 bitcoin at this time you would get back 3500$. So while you lost 50% in ALTs price you essentially lost 65% on an overall fiat basis...
On the other hand, let’s assume your ALT lost value and you sold it for 0.5 bitcoin only but Bitcoin price doubled from 10,000 to 20,000...
In this case you would get back 0.5 x 20,000 = 10,000$ which means you didn’t lose anything in fiat terms inspite of losing 50% in ALT prices...
What to keep in mind while trading ALTs ?
- Keep in mind an overall BTC trend
- As long as BTC is likely to range / go up, you are good to go ahead with ALTs
- During downturns and bear trends, you need to see what’s the worst case BTC scenarios. Assume if BTC is likely to lose 10% than you need to ensure your ALT makes minimum 20% just to breakeven
- If BTC is likely to lose 25%, you need to make 50% in ALTs just to breakeven
So when you come across good ALT plays & when BTC is ranging, it’s safe to play them without much stress. Even if BTC is in downturn but not likely to lose much, it’s still safe to play ALTs at good levels...
Only if you expect BTC to drop 50% & ALT to gain 25% than it’s a bad trade...
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