Often we receive questions such as “Why is the coin that I have invested in been dropping for 2 weeks if the Project is that good?”. Or “What big news is out today that my coin keeps going up?”.
These type of questions remind me of the fact that people start investing in crypto currencies without really knowing how the market works. So I will try to explain some terms to help put anyone who has just starting in the crypto world at ease.
JUST LIKE THE TIDE AT THE BEACH
The first thing we need to understand is that generally in the markets, not just in crypto, but also the stock market, when the tide is up it goes up for almost everyone and the same if it goes down. So it is important to understand that our coin almost never moves by itself. A project is not an island but a ship that navigates the market’s waters.
Bitcoin Dominance
In the crypto currency market, Bitcoin has huge capitalization weight, which affects what happens in the market. Imagine if we created this super group in the Nasdaq of the 10 heavy weight companies (Apple, Google, Amazon, Facebook, Microsoft…), all grouped in one huge enterprise. Anything that goes on in this company would have a big impact in the Nasdaq market as a whole.
Market Cycles
The market moves in different stages, which we will describe. It’s like a change in the weather. It is important to be ready to face the current weather, if it’s cold we wear a jacket, if it’s hot we head to the beach and if it rains we grab our umbrella.
Creating long term value
The best projects constantly release their products in the market and improve their ecosystem. If you get it right your investor base will go up with each cycle. In the end it’s a matter of when everything goes down you go down a little less , and when everything goes up you go up a little bit more. When you repeat this for 40 cycles you get as a result a cryptocurrency that is worth more now than 2 years ago.
BTC and USDT pairs
The crypto market is rather peculiar because it works with two currencies. When we say that a coin has increased its value we are referring to Bitcoin pair or Dollar pair. For example, if we have eGLDBTC it refers to how much it costs for one eGLD if we buy it with Bitcoin. However, if we talk about the eGLDUSDT pair it refers to how much one eGLD costs if we buy it in dollars.
Bitcoin, Altcoins and stable coins
Altcoins are all the coins that are not Bitcoin nor stable coins. Stable coins, such as usdt, are the crypto version of fiat coins (traditional). The market has a clear differentiation between these 3 groups because on each cycle one of them earns more in terms of performance.
The existing cycles
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Life can be wonderful: it doesn’t happen very often when we have both Bitcoin and Altcoins going up. It doesn’t last long since one of these 2 groups encounters resistance and the cycle switches. Here we will usually see USD pairs go up and the BTC pair of the altcoins tends to be stable or to show small growth.
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Only Bitcoin makes sense: There are times in which the market turns its focus completely to Bitcoin almost as if the other coins stopped having value. Here we will usually see Bitcoin go up and the BTC pairs of the Altcoins drop. Often the USD pairs of the Altcoins don’t drop, they remain sideways.
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The Altcoins will eat up the old Bitcoin: These are times when the market is willing to sell its bitcoins to buy the most promising projects, the most innovative or trendy. We generally see the BTC value of Altcoins go up. Bitcoin is this case remains lateral or slightly drops. This cycle can last several months.
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The King drops and the Prince rises only to die as well: Similar to the previous cycle but more aggressive, it can last a few days and does not happen often. A lot of money travels from Bitcoin to the altcoins. This translates into a big rise in altcoins (rally altcoin). In order to protect the money in altcoins it gets converted into USD, therefore the altcoins end up dropping afterwards. So Bitcoin drops while the altcoins go up quickly ,only for them to drop.
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The crypto world does not have a future: This cycle involves news such as “certain country has banned crypto” and others following that line. Everything keeps constantly dropping , both Bitcoin and Altcoin. It can last a long time depending on how high it starts and the necessity within market to lower the prices to make them more affordable.
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Crisis: The most negative cycle, usually caused by an event outside the market. One example is back in March 2020 with Covid,we saw everything dropping really fast and a few days later drops of 50% or more. Both Bitcoin and Altcoins.
Strategies
The first thing is to keep in mind that it’s almost impossible to guess when a cycle will begin or end. We can only determine in which cycle we currently are in, in order to act accordingly.
Active Management or Passive Management
In our portfolio (the whole of our investment) if we move funds between our assets in different cycles we engage in active management. If we configure a balanced portfolio and we don’t touch it we are doing passive management. Active management is more profitable if it’s done right, but it is also easier to make mistakes. Passive management requires more patience because you see the losses without doing anything about it.
Real branching
A lot of times we tend to think that because we have 4 to 5 altcoins we have a diverse portfolio. If we are in a cycle where all the Altcoins are suffering our whole portfolio will go down too. Like it or not we should always have part of our portfolio in Bitcoin and stable coins. A simple 5% in USD can turn into 15% in our portfolio during a crisis, which will make our purchase capacity higher when the prices are low.
Progressive Movements
If we are in a cycle where our altcoins are excelling in BTC pairs and we are reaching tops in terms of Bitcoin, we should consider taking profit to compensate the portfolio. So of each altcoin we can sell a small part to buy Bitcoin. These kind of movements should not be done in just one transaction, we should do a small weekly transaction or every 3 days, in small parts. Just in case it keeps going up.
Don’t take on a Maximalist approach
No matter which cycle you are in it’s not worth it to go 100% on stable coins, 100% on Bitcoin or 100% on Altcoins. If you bet on Altcoins in order to have a higher performance in the long term your portfolio should never be under 60% in altcoins. Even if it’s sunny it’s always a good idea to have an umbrella at hand just in case the weather turns. The cycles can change anytime without prior notice.
Configurate a radar
With an app such as tradingview you can configure the dashboard to show you pairs to follow. I usually have 6 USD pairs and 6 BTC pairs that work as a radar. 2 large cap, 2 medium and 2 small ones. This makes it easier to know how we are doing with just a quick look. Be sure to add the Bitcoin price , it is always necessary to know what Bitcoin is doing to determine the cycle we are in.
Have faith in your coins
For a long time investor the most important part is to study the Project in order to decide if you will invest in it. As an investor you need to analyze the reasons that make you believe this project in 2 to 3 years time will be worth a lot more. If you have done this research you will have enough confidence to go through the highs and lows without letting go of your precious investment.
Be water my friend
The cycles are part of the market and we have to learn to live with them. I try to make a small purchase each week as an exercise to force myself to check the cycle we are in. This weekly purchase can be towards an altcoin, bitcoin or dollars.
Conclusion
The crypto market is complex but at the same time simple. If you learn these 4 concepts you will have enough confidence to make small choices each week. Never make abrupt moves in your portfolio as this usually ends up badly.
If you want to expand on this subject or you have questions you can contact the Elrond Network Telegram Group. In it there are people that not only like Elrond but also enjoy talking about the blockchain industry in general.