I live at an altitude of 5000 feet (1500 meters) above sea level in Colorado. My kidneys sense the reduced amount of available oxygen and produce the infamous hormone erythropoietin or EPO. EPO then induces stem cells within the bone marrow to create more red blood cells. This results in increased oxygen carrying capacity in my blood.
Athletes sleeping at very high altitude get a three to six percent improvement in their athletic performance. To see these benefits, though, they need to "train low." You sleep high -- many times in special hypoxic tents -- to get the higher hematocrit levels. You then train at low altitude so that your oxygen is not the limiting factor in your workout. Rather, you use the maximum of your muscle strength. Stressing your muscles is what leads to muscle growth.
I live at 5000 feet, but I've been riding at 500 feet in Austin, Texas. My riding partners will tell you that my breathing is audibly labored when I ride hard. This is completely subjective, but I feel like I'm pedaling stronger and I haven't been breathing hard here at low altitude. My legs feel much more sore than usual, meaning I'm stressing the leg muscles more than usual.
Sleep high, train low. It's the legal way to increase your EPO and hematocrit levels.