Altcoin vs Bitcoin: Smart Investing in Crypto's Twin Powers

Bitcoin​‍​‌‍​‍‌​‍​‌‍​‍‌ beat all other cryptocurrencies this year by a wide margin, its market cap reaching over 2.2 trillion dollars. While altcoins have been bleeding red all this time, Bitcoin saw very strong rallies. Investors​‍​‌‍​‍‌​‍​‌‍​‍‌ (among them are really clever people with professions, by the way) scatter their money across several coins they hardly understand and then if things go south, they all panic sell.

Why Is Bitcoin & Altcoin Different?

I dumped loads of money into "Altcoins", treating them like my pet toys before I even figured out the difference between Bitcoin and Altcoins.

Bitcoin: The First One

Digital gold that runs on computing power

Bitcoin​‍​‌‍​‍‌ is the one that is often referred to as the change-agent, that totally restructured the financial industry by introducing a revolutionary technological concept. The originator was a guy (or a group of people) known as Nakamoto. This was the first money that has the guts to tell banks to get lost. Sometimes people call it gold, and it is partially true in that comparison - except that these are not ores which they are digging but rather supplying power to their machines. The built-in scarcity? From a value point of view, it is quite a game-changer.

Bitcoin operates on a set of rules called Proof-of-Work. In short, it is an agreement that the utmost efforts should be made for security and stability and, consequently, other features should be kept to a minimum. Are there any changes to the software? Very rarely and slowly. Developers are quite extreme in their caution and can even be considered almost paranoid.

Altcoins: All Other Cryptos

Altcoins​‍​‌‍​‍‌​‍​‌‍​‍‌ refer to the digital currencies which are not Bitcoin. One of them, like Ethereum, can run smart contracts, while the other can be used as tokens for the payment purposes, privacy, or stability providers.

After my several years in crypto, I've become pretty skeptical about whether the rise of niche Altcoins projects is possible. There are a lot of projects that look like tremendous problem solvers, but scarcely anyone uses them even if their technology is highly advanced. The harsh truth is that due to network effects, capital will almost always follow the platforms that can attract both developers and users - which usually results in bigger, more general platforms winning over the highly specialized ones.

How Assets Perform When S*t Hits the ​‍​‌‍​‍‌Fan

Thing is, when assets come from entirely different places, they usually have very different reactions to market ​‍​‌‍​‍‌downturns.

The​‍​‌‍​‍‌ Security vs Innovation Tradeoff

Metaphorically, one could imagine Bitcoin as a fortress having tough walls - it is standard, secure and, let's say, a bit boring. On the other hand, Ethereum and the like are moving the concept towards highly interconnected cities, where each unit is related to the other units. For instance, DeFi lending platforms could be connected with NFT marketplaces, and from there, they could be linked with governance systems. 

It's all very smart when things are going well. But, the situation changes quite significantly when something goes wrong. The Terra/Luna fiasco should be a loud warning sign pointing that way. The collapse caused a domino effect that literally impacted the numerous projects that were supposed to be "unrelated". The very same links that turn these ecosystems into giants, however, expose them to risks.

Economic Models: Fixed vs. Flexible Supply

Fixed or flexible? How crypto supply works

Within the sphere of cryptocurrencies, the number of Bitcoins is limited to 21 million, and each four years "halving" events take place, when the new Bitcoins production rate is cut by half. It is estimated that the final Bitcoin will be mined at around 2140, after which the Bitcoin supply will be closed.

That is the scarcity which makes Bitcoin "digital gold" and it is the one that grants investors supply ​‍​‌‍​‍‌​‍​‌‍​‍‌safety.

Altcoins​‍​‌‍​‍‌ have varied supply mechanisms. Take Ethereum for instance. It is unlimited, while a few other tokens have a burning mechanism to reduce their supply, and some increase gradually through staking rewards. Basically, all these methods allow for a more adaptable monetary policy but at the same time, they raise the question of value at a far-off future.

Understanding Market Cycles: Timing Is Everything

What was the most insightful moment of my crypto journey? It was the understanding that Bitcoin and Altcoins go through the cycles of their ups and downs in such a manner that one is dominating while the other is losing quite regularly. 

How Performance Plays Out Through ​‍​‌‍​‍‌​‍​‌‍​‍‌Cycles

In my opinion, if someone just tells you “Bitcoin always beats Altcoins” or the other way round, he is either severely misguided or is part of some dishonest dealings. So, what is the truth? Actually, they both are in the spotlight on different days.

The pattern is mostly that Bitcoin is the one to initiate the move (there are also instances when nothing significant happens for a couple of months), subsequently, the change reaches Ethereum and other big-cap Altcoins, after that the mid-tier projects and finally the small speculative tokens are flying to the very top.

Since​‍​‌‍​‍‌ the introduction of ETFs and institutional money from Wall Street, the pattern is not that visible anymore, and some people even go as far as to say that the mainstream acceptance of Bitcoin is actually the reason that breaks the historical relationship between Altcoins and Bitcoin. The verdict is still out, but it is definitely worth seeing.

Bitcoin Dominance: An Indicator of Where the Money is Going

Spot Altseason using Bitcoin’s market share

If​‍​‌‍​‍‌ we put it very simply, one of the very straightforward metrics that can tell you a lot more about where the cash is flowing than most complex indicators is Bitcoin dominance, i.e. Bitcoin's share of total crypto market value.

As an example, a high Bitcoin dominance (above 65%) means that most of the time, Altcoins are not in a trendy position while a low Bitcoin dominance (under 40%) means that the opposite is true. At such points, the price of Altcoins is very often going to skyrocket, thus the "altseason" ​‍​‌‍​‍‌ phenomenon.

At CoinMinutes, we are constantly on the lookout for such a signal​‍​‌‍​‍‌. Large holders, when they are certain that Bitcoin has reached its zenith (even if only for a short period), begin to seek better returns in other places. If you only observe the price, this money movement might not be very clear, but it is quite conspicuous if you are looking at dominance ​‍​‌‍​‍‌trends.

However, on the flip side, dominance should not always be regarded as a flawless indicator. There were times when both Bitcoin and Altcoins increased their value simultaneously and now, their interaction is different as the market is getting mature. Consider it as one of your many instruments rather than your ultimate ​‍​‌‍​‍‌decision-maker.

Market​‍​‌‍​‍‌ Moods And Halvings

The last Bitcoin halving was in May 2024. If we look at the past, after these halvings, there have been the biggest and most volatile market expansions with the duration from 12 to 18 months. However, the connection is not very direct each time. Sometimes it takes a few months for the supply shortage to ​‍​‌‍​‍‌cause the effect.

Risk​‍​‌‍​‍‌​‍​‌‍​‍‌ Management: What Differentiates Winners From Losers

I was taught this lesson by the market itself:

Influence of Volatility: More Than Just Figures

The rule of thumb is that if Bitcoin loses 20%, the most influential altcoins will cut their value by 40-60%.

For example, if you had taken $10,000 out of your wallet to buy Bitcoins, that amount of money could fluctuate anywhere between $4,000 and $8,000 in either direction within weeks. As for that money in Altcoins, the fluctuation could be $6-12K or even more.

Such variability goes beyond any numbers and thus has a very negative impact on the investors' psyche. The first time they see half of their money vanish, people who had promised themselves that they would be able to withstand such a loss, get shocked. After that, spirits win the battle, panic-selling at the worst place, most of the time, is, regrettably, the immediate reaction.

Project Failure Risk: When Altcoins Bankrupt

Most of the Altcoins have gone to zero. The majority of the failure narrations are those of projects having weak fundamentals, which have been left by the teams, or overshadowed by competitors.

Bitcoin, on the other hand, has been a clean record holder for more than 14 years, and because of its well-established network, it is not easy for it to fail completely. It is this safety feature that makes Bitcoin a core holding rather than a speculative gambling asset.

Risk Management That Actually ​‍​‌‍​‍‌​‍​‌‍​‍‌Works

Regarding​‍​‌‍​‍‌ Bitcoin scenarios, larger positions (10-30% of the crypto portfolio) may be kept as they're more stable with lower failure risk. However, the altcoin positions' size should be reduced (5-10% per project). This amount of money can restrict the risk of one single project performing badly to the extent that it can cause the loss of your whole ​‍​‌‍​‍‌portfolio.

Don’t bet on one coin: Diversify Altcoins

Altcoins​‍​‌‍​‍‌ diversification is as important as the Bitcoin/Altcoin split. To make the point clear, let's say that you're going to allocate 20% of your portfolio just to the altcoins. Then, you shouldn't be putting the entire 20% into one token, but rather you should be dividing it between 4-5 different projects. This spread cuts specific project risk while keeping your exposure to Altcoin upside. Besides that, picking projects from different sectors and having different market behaviors will also contribute to your portfolio becoming more stable.

It definitely makes sense to have your exit points even if you haven't bought yet. What I am really trying to say is that you should definitely be using the pen and the paper here. Currently, I have some post-it notes with my exit points written on them which are stuck on my monitor. It looks a bit silly, but it is serving the purpose.

How to Build a Personal Strategy: Questions to Ask

The best Bitcoin/Altcoin combination for you depends on factors that most of the "experts" don't talk about.

What Kind of Crypto Investor Are You, ​‍​‌‍​‍‌Honestly?

Question 1: What Is Your Real Risk ​‍​‌‍​‍‌​‍​‌‍​‍‌​‍​‌​‍​‍‌Tolerance?

I came across investors who during bull markets claim that they love risk but after their first 30% drop they can't wait a single moment and in panic sell everything.

People with a high-risk tolerance may choose to allocate a larger part of their capital to Altcoins (30-40% of the crypto portfolio), in order to capture the growth opportunities. This approach carries more risk but also more return potential, provided that the possibility of some of the investments losing completely is acknowledged.

Conservative investors should primarily place their money in Bitcoin (80%+ of the crypto portfolio) and only a small amount be allocated to chosen Altcoins. The decision to follow such a strategy provides a limited growth potential, at the same time, it ensures the stability of the investment during bear markets.

Question 2: How deep does your crypto knowledge actually ​‍​‌‍​‍‌go?

If you consider "tokenomics", "consensus mechanisms", and "network effects" as technical concepts rather than just buzzwords, then you are in a position to choose specific Altcoins. Otherwise, continue with Bitcoin and maybe 2-3 established projects until you gain more knowledge. There is no harm in admitting what you don't know. It's better than making expensive mistakes.

By honestly evaluating these points, you will figure out the right crypto asset allocation for you. 

Rules That't Save Your *ss (Eventually)

How to survive wild crypto market swings

Whatever​‍​‌‍​‍‌ strategy you go for, there are a few rules that will stop you from making a move that can only be described as disastrous:

It doesn't matter what you do, don't gamble your whole life away. Even though there are some formalities now, the crypto market is still very much a Wild West situation. I, personally, keep my total exposure to crypto at such a level that it wouldn't be the end of me if it were to disappear. For me, that's less than 15% of my investments. Your number could be different, but you had better d*mn well have one.

In fact, you are required to note everything. Don't trust your memory, especially during market extremes. You will find ways to fool yourself that you intended to hold for a longer period when things were going up, or that you were in a panic when they ​‍​‌‍​‍‌​‍​‌‍​‍‌crashed.

Don't​‍​‌‍​‍‌ wait until all of your profits disappear, start cashing in on your profits bit by bit. Make a rule so simple that it would be hard for you not to follow it, for example, "when the position doubles, take 20% off the table." By doing this, you will definitely convert part of your profits into real money before the stock market react to correction and all your profits vanish.

I divided my cryptocurrencies in my mind into quite weird categories: Bitcoin is the money I would use in a catastrophic scenario. Ethereum is the money I invest in the futuristic tech development. Other than that, I see buying Altcoins as purchasing lottery tickets but with slightly better winning chances. Such a way of thinking helps me to have a sober view of the situation when markets are in ​‍​‌‍​‍‌turmoil.

Why​‍​‌‍​‍‌ CoinMinutes Was Founded (And Maybe You Ignore It)

CoinMinutes​‍​‌‍​‍‌ wouldn't be here if not for our founder doing one expensive blunder after another while developing a very peculiar obsession with charts. We are far from being Bloomberg or something like that - it was only 3 people who were extremely passionate about this stuff.

To some extent, our newsletter represents a weekly version of this article containing a lot more of the real stuff and also including:

• Market​‍​‌‍​‍‌ updates that actually make sense of what is going on in the market (I normally write these at half-caffeinated and around 6 am)

• The real money moves (what is going on behind the scenes rather than the CT influencers that are shilling)

• An occasional "FOMO Check" if I notice that everyone is ridiculously getting too excited about some rubbish.

• Security warnings

• Long reads on the underside of the non-hyped projects

If you have made it this far, then you are probably the kind of person who values our slightly insane but hopefully insightful perspective.

Drop by and see us at https://coinminutes.com/ if it's your thing, or don't - I am not your dad. But hey, our free Friday emails are pretty cool, just saying. Hope to see you there!