- Some new to trading will have been shocked to find that a bounce of equal percentage to a drop does not result in the same dollar value
- If a price drops 50%, a gain of 50% does not make you whole
- Why is this, and how can you work out your sell price to break even?
Many novice cryptocurrency traders will have found out something during the recent crash – a bounce doesn’t always negate a drop. Or more specifically, when a coin drops by a certain percentage and then rises again by that same percentage, the dollar value is still down. The reason why this happens isn’t complicated to understand, but it’s important to note for those who are currently underwater with their bags and are looking to get whole again.
Percentages are Based on Current Holdings
Let’s say you buy 100 ABC coins at $1 each. That’s a $100 outlay. Then let’s say the value of ABC coin drops 50%. Your holding is now worth $50. Now let’s say that value increases by 50%. You’re whole again, right?
Wrong.
Percentages are not absolute figures, they are only relative to another figure, and in our case they are relevant to the current value, not the value at purchase. This means that the 50% drop was from the buy price, whereas the 50% gain was from the lower price.
To put this into context, your ABC coin holdings dropped 50% to give you a $50 value, which means your holding was cut in half. The 50% increase that follows only applies to your current holding of $50, not the initial holding of $100 – 50% of 50% is 25%. This means that, despite the percentage gain being the same, the absolute gain is only 25%.
In order to make yourself whole after a 50% drop you need a 100% gain because the value has halved, and when something is cut in half you need twice the current amount to get a whole again.
A 50% Drop Needs a 100% Bounce
To bring the concept home, imagine cutting an orange in half. You have gone from having a whole orange (100%) to having half an orange (50%). To get back to a whole orange from the remaining half, you need to double the amount of orange you have; you need another 100% on top of your half an orange to get the whole orange you started with.
When it comes to setting sells then, don’t work in percentages but absolute figures. If you’re down 50% on your ABC Coin holdings and you want to make yourself whole again, set the sell for double the current price, not 50% up, to avoid a nasty shock.
For other trading tips, see our dedicated crypto trading section.
