Introduction

I know many of us tend to value our crypto investments in terms of their USD valuation, myself included. After all, the majority of our transactions like shopping and paying the bills are done in fiat. However, if you’re investing in alts, I believe you should also look at their performance against BTC and ETH, and this post will be explaining why.

Risk and Return

If you take on high risk, you expect a higher return. For example, in stocks, the ‘ blue chip’ stocks are considered low risk, but they have low expected returns. However, penny stocks are high risk so their investors expect a higher return. In crypto, BTC and ETH are the 2 least risky cryptocurrencies to invest in. There are several reasons for this:

Huge market cap – BTC and ETH combined make up 60% of the total crypto market cap. The market cap of ETH (#2 in market cap) is also 5x bigger than the market cap of BNB (#3 in market cap). It would take a huge amount of money flowing out of these top 2 cryptos to significantly affect the price, in comparison to alts where a few whales selling could result in a crash. Historical performance – Both BTC and ETH have survived bear markets and reached new ATHs in bull runs. When you look at the weekly charts, you can see that both coins experience bull markets and bear markets, but they tend to trend up with time. However, many new alts have not even been through a bear market (eg. SOL, LUNA, DOT, AVAX).

Opportunity Cost

Opportunity cost is basically the potential benefits you miss out on when choosing one investment over another. If you prefer formulas to words, we can define opportunity cost OC = BO – CO, where BO is the return on the best forgone option and CO is the return on the chosen option.

In the context of crypto, if the alt you are holding has been bleeding against BTC and ETH for most of its life, you have to reevaluate why you are holding it in the first place. You are holding an asset that is riskier than BTC and ETH but you are still consistently getting a lower return. Thus, there is a huge opportunity cost if you continue to hold that alt.

Examples of alts that bleed against BTC and ETH

LTC/BTC

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LTC generally bleeds against BTC, although there are short periods where LTC sees pumps against BTC

LTC/ETH

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LTC performed well against ETH in 2018 (ETH was getting absolutely destroyed in 2018) but ever since 2019 began LTC has just been constantly bleeding

XRP/BTC

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XRP occasionally has some very short and parabolic pumps, but it’s been bleeding for most of its lifetime

XRP/ETH

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XRP has been bleeding against ETH ever since the start of 2019

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So, what should you do?

Make sure your alt at least goes sideways against BTC and ETH. There will be periods where your alt outperforms BTC and ETH and periods where it underperforms, but at least it will be useful in your portfolio. However, in a bear market, most alts (including ETH) will bleed against BTC. Many will never recover.

Always keep the concepts of risk vs reward and opportunity cost in mind. Plenty of alts (especially low cap ones) are very risky but rarely outperform BTC or ETH throughout their lifetime. This is why it’s generally a bad idea to throw lots of money into low cap alts unless sentiment is ultra bullish and you can throw money into practically any crypto and make money just by holding it for a few weeks (eg. 2017)

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TLDR

Make sure your alt at least goes sideways against BTC and ETH, and has periods where it significantly outperforms them.