Most investors today are looking to altcoins for profit; they focus solely on altcoin analysis but don’t take into account the main driving factors. Bitcoin and Ethereum hold the largest amount of capital. Ethereum’s market system affects altcoins in the ethereum ecosystem and Bitcoin effects all altcoins in the digital currency market.
Bitcoin is a non-government issued currency that is commonly used to hedge against political uncertainty. Prices are affected when:
- An Exchange Goes down
- Governments give legitimacy to Bitcoin (approving it and rewards people for using it)
- Governments negatively regulate Bitcoin (discouraging and punishes people for it)
- Political turmoil and uncertainty in a countries market causes people to flee/hedge
- Bitcoin Governance & Politics like Segwit cause people to flee Bitcoin to alternative cryptocurrencies
- And So on
Everything is Pegged To Bitcoin
The Value of all altcoins directly correlate with Bitcoin, except on rare occasions known as the flippening. The flippening is when altcoins maintain value and rally independent of Bitcoin – usually a reflection of investors hedging uncertainty with Bitcoin in other coins. To this effect when Bitcoin rises, the altcoins tend to rise with it.
Sometimes this means that when Bitcoin rises in value, altcoins decline in value. Sometimes it means when Bitcoin has a strong rally, altcoins follow suit, and vice versa. If Monday’s are sell days for Bitcoin, then it could very well be a buy day for altcoins and vice versa. It helps to pay attention to what the big coins are doing to understand what is happening to the smaller coins.
Bagholding vs. Selling & Holding
It’s important to make a distinction between bagholding vs buying and holding.
In traditional currency it is called Bag holding when the price of a stock plummets in value until it is worthless. The reasons could be they:
- Neglected their underperforming portfolio
- Investor hopes the price will recover
- Investor has not set good limits on losses
- Investor does not have a good exit strategy to avoid the situation
In cryptocurrency it is called Bag Holding when:
- traders buy scam coins or
good coins during a pump
- hold while the price crash down during the dump
- and sell at the bottom
If the coin is a scam coin you have to hope for another ‘pump’ before you can exit, and that could take weeks or months or even a whole year or more. If it’s a coin with good fundamentals, the wait may be shorter.
Buying & Holding on the other hand is a strategy used to describe people who buy and hold as part of a long-term strategy. While most people typically buy low, there are some people who buy as part of their strategy a coin at its peak, akin to momentum traders. While their plan may vary these traders have their own methodology, but for the most part, these are people who aren’t buying based on ‘short’ term fluctuations but rather part of a longer term strategy.
Corrections vs. Crashes
Corrections are a natural part of the economy. Long term traders don’t really care about them, and may even only make 2-3 Exits per year. Spring and Fall. With Summers and Winters being a common time for accumulations. Corrections are always inevitable after every major rally or bubble. Corrections then are temporary pullbacks that last about 3 months or so, before continuing upward. With a correction you can usually see the slow reversal of a coin rescinding.
Crashes on the other hand are what people shout when they say, “Bitcoin is dead”. It happens much quicker and more sharply, and can result in the traditional market cause a bear market or recession. This recession is because it limits what the businesses who represent the currency can purchase. Cryptocurrency is not the traditional market; In Cryptocurrency you have currency that behave as tokens or shares, and for those members it may be true; but you also have currencies that function as part of a larger machine, and other coins which act simply as an exchange of value. This makes cryptocurrency unique.
Corrections and Crashes can lead to long-term bear markets, where prices are undervalued for a large period of time. This is a great area to buy if the coin has strong fundamentals.
A Good Coin Drops Half The Value Not All Of The Value
Typically when some people think of crashes they think of the price dropping to next to nothing. My opinion is that a good coin:
- won’t lose more than half of its value that it gained during rally.
- Will make back the gains in 3-6 months
However if a coin falls back to the price it was before it’s rally then it is not performing well, and as such may have some underlying issues. If it stops at a half-way point, this is a good sign that more growth is on the way.
Always Ask Why Is The Price Rising?
Whenever a coin starts to rally I look for the reasons why it is rallying. I want to know Why the coin is having dramatic rises. This is important because it helps me figure out how much is hype and how much is actual demand. When a coin is falling, this too helps me figure out what is hyped up fears vs. actual demand declining. One is driven solely by speculation, hoped for value. It stands on nothing and so it is more likely to collapse. The other is driven by actual value and usage, it stands on something, if people using it were to pull out and stop using it, then there would be concern.
- Rallies & Corrections – any coin that has a sudden and abrupt rally upwards, will have a sudden and drop correction downward. At any point that this happens either be prepared to short your positions, or be prepared to go long. Never buy at the top and always stagger your entries. In these areas there’s still room to exit; but also the possibility that you could exit at the wrong place. Use Fibonacci to help determine how far it could correct to calculate your entry and your emergency exits.
- Pump n Dumps – a pump n dump has to be timed very carefully. The best way to plan for this is to find an accumulating coin, and set a price that is low but not too high. Buy low, sell at the peak. These sudden ‘peaks’ will have quick drops and can happen quicker than you can actually execute your trade in a matter of seconds.
- Natural slow rises – a coin that steadily climbs up in value, and steadily rises down without hype and fud tends to be driven by actual usage case.
A coin that rises gradually and slowly overtime, will have more solid ground to stand on than one that rises out of speculation.
Some Tips For Protecting Yourself
- Go 3-6 Months Long or Longer
- Develop a Strong Risk Management Strategy
- Diversify your Portfolio
- Have an Exit plan
- Rebalance your portfolio daily/monthly/yearly based on performance