BTC pump ! what about Altcoins ?
Today I will answer a question that comes up frequently in our trading groups and on Twitter:
Why do ALTs decrease when the BTC rises? And more specifically, why did the alts market dumped on April 2 when the BTC soared ?
There are two main reasons for that:
I/ The first reason is simply mathematical. If the BTC increases against the dollar, while the ALTs stagnate or increase to a lesser extent, you will then have a deficit in BTC. However, in USD, you will not have any change, or even an increase. How is that possible?
It’s very simple, it’s linked to the notion of absolute and relative value. Indeed, ALTs can be calculated either on the basis of BTC or on the basis of the dollar. As you know, most ALTs are backed by BTC, which is why you will see on Binance: ADX/BTC for example. We therefore have the value of ADX backed on the BTC.
A small practical case study to go further:
- I have 1 ADX
BTC/USD makes a plus +10%
ADX/USD, makes it +2%.
-> ADX/BTC will then lose -8%. The ADX/BTC pair being calculated according to the BTC, therefore if the BTC increases, the price of the ADX/BTC pair will decrease.
-> In USD, your portfolio will have increased by 2%.
As you can see, everything is very relative.
II/ The second element here is the reason for the pump. Let’s take the case of the BTC pump that took place recently (April 02 around 4am). An influx of purchase orders for more than 20,000 BTCs was observed and several analysts pointed out that these orders most certainly came from the same person or institution. This massive purchase of Bitcoin (and not altcoins) has caused the BTC price to move sharply, leading to a rapid and very significant increase of more than 20%.
What happened to the ALTs?
A nice big fall, with a return on support for the most part.
Is that normal?
Absolutely ! We return to the first point and the rule on fractions: when the denominator increases, the result of the fraction decreases, hence the general decrease on ALTs. And in this case, the investor bought Bitcoin, and Bitcoin only. It is not an organic market increase, it is a pump caused by a single wallet. The difference is that this did not give the market time to position itself “normally” on altcoins, thereby causing a decline in their value in BTC.
Let’s take a concrete case: the ZRX.
As you can see on the following graph, on the left we have the ZRX/USD and on the right the ZRX/BTC. Let’s look at what happened on April 2nd when the BTC increased sharply: the ZRX/BTC pair (right) fell, indeed as seen previously, the denominator (BTC) increased so the result of the ZRX/BTC fraction decreased. For the ZRX/USD pair it’s another story. Indeed, the value of ZRX has increased against the dollar, hence the increase you can see on the graph on the left.
To summarize: During a BTC pump, if the growth of BTC/USD is higher than the growth of ALTs/USD, you will artificially see ALTs/BTC values in decline. But if you are losing out on the BTC sum, you could very well be winning in dollars.
So yes, there is a risk of having a stop loss, but such an event is not really supposed to happen. A stop loss is a good thing, it is a guarantee and an important safety measure, so don’t neglect it.
