Here's a quick reference:
Assume you pay $10,000 for one bitcoin.
Using that one Bitcoin, you now purchase an ALT, which is priced at 0.001 bitcoin. So you just purchased 1000 ALT for 0.001 BTC.
Now consider the following scenarios:
Assume that after a month, your ALT has doubled and is now worth 0.002 BTC. You made the decision to sell your ALT. You now have two bitcoins. You made the decision to convert your Bitcoin to fiat currency. At that point, the price of Bitcoin had dropped from $10,000 to 9,000 USD.
You sold your two bitcoins for $9,000 and received $18,000 (don't be picky and ask me about exchange commissions and all that).
So, in essence, you made 100 percent profits in BTC but only 80 percent profits in USD. That means that for every 1% drop in Bitcoin, you must make a 2% profit in ALTs to remain profitable. Bitcoin lost only 10% of its value, but you lost 20% of your profits when you converted back to USD.
So, if you were to invest in ALT, you would need to consider the potential downside risk in BTC versus the potential upside in ALT. If BTC falls by 20%, you'll need to make 40% profits in ALTs just to break even in fiat terms (no profit, no loss).
Consider the following scenario:
If the value of your ALT drops after a month. This is what occurs. Assume your ALT dropped from 0.001 to 0.0005.
You decided to sell it, and you now have 0.5 bitcoin in your possession. Bitcoin has now dropped from 10,000 to 7,000.
If you converted your 0.5 bitcoin right now, you would receive $3500. So, while you lost 50% on the ALTs price, you effectively lost 65% on a fiat basis.
Let's say your ALT lost value and you sold it for 0.5 bitcoin, but the Bitcoin price doubled from 10,000 to 20,000.
In this case, you would receive 0.5 x 20,000 = 10,000$, implying that you did not lose anything in fiat terms despite losing 50% in ALT prices.
What should you keep in mind when trading ALTs?
Keep in mind the overall Bitcoin trend.
You can proceed with ALTs as long as BTC is expected to range / rise.
During downturns and bear markets, you must consider the worst-case BTC scenarios. Assume that if BTC is likely to lose 10%, you must ensure that your ALT gains at least 20% in order to breakeven.
If BTC is likely to lose 25%, you must make 50% in ALTs just to breakeven.
So, when you come across good ALT plays and BTC is ranging, it's safe to play them without too much concern. Even if BTC is in a downturn but not likely to lose much, it is still safe to play ALTs at good levels.
Only if you expect BTC to drop 50% and ALT to soar 25% than a bad trade.
I hope this helps you understand the cunning nature of cryptocurrency trading.
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