A contrarian bet: altcoins
We’re in a scenario today where the sentiment surrounding altcoins is disproportionately negative.
Back in December 2018, I stated that Bitcoin was over-sold and had most likely bottomed. Fast-forward 9 months, Bitcoin has increased by more than 100% in price whilst most altcoins have failed to surge synonymously. It’s August 2019, and the sentiment towards altcoins reflects that of Bitcoin 9 months ago. People are scared to take the plunge, wondering if they’ll ever return, just like people were worried about Bitcoin.
Bitcoin is an incredibly exciting invention that is well on its way to becoming a global reserve currency, especially considering the fact that traditional forms of ‘currency’ are diminishing in value. Bitcoin has incredible upside to come, but should this mean that we ignore other projects that may have even more upside returns?
A quick read of the ‘lindy effect’ will tell you that the chances of an alternative coin replacing Bitcoin as a potential ‘digital gold’ are incredibly slim. Bitcoin continues to grow in security (mining power) and status (public perception), two elements that are creating a feedback loop favoring Bitcoins position on the throne. This aligns with the shift in the Bitcoin narrative, veering towards a ‘safe-haven asset’, an idea that's becoming increasingly attractive in today’s unstable macro-economic outlook. Yet, if we’re to assume that Bitcoin will be the only cryptocurrency to provide any real value to the world, we could be left short-changed from the value-potential that's about to be created in the space.
What’s the case for altcoins?
Altcoins — A word that is as divisive within the crypto community as Bitcoin is within the general community. A disadvantage that ‘altcoins’ have firstly, is that they are all clustered into this term that doesn’t have a positive reputation within the crypto-sphere. Subsequently, this provides an opportunity for thought-leaders in the space to tarnish the perception of these projects whilst painting them all with the same brush, a lazy attempt at edifying Bitcoin. This masks any meaningful fundamental progress that any of these alternative projects have achieved.
- Investment bank to launch $1bn worth of security tokens on the Tezos blockchain.
- Jaguar Land Rover partnering with IOTA for data and value transfer.
- MoneyGram and Ripple entering a 2-year strategic partnership to leverage XRP for exchange settlements.
- Google announcing Chainlink as an official cloud partner.
Experienced Bitcoin hodlers will tell you that price is not always indicative of fundamental value. Whilst Bitcoins price approached serious under-valued territory in Q4 of 2018, the same argument can be made for a handful of altcoin projects in today’s market. This blog isn’t here to decipher which altcoin projects those are. But, below will give you an indication of what we can expect.
Bitcoin dominance is at it’s highest since May 2017, close to the time that BTC broke ATHs. History suggests that altcoins do not see much positive price until Bitcoin breaks ATH’s for the new bull-market cycle.
Let’s roll back to early 2017. Bitcoin bottomed roughly 18 months prior. Altcoin performance was pretty much dead during Bitcoins resurgence. Bitcoin breaks ATHs in late Feb of 2017. This is soon followed by a 30% correction. This 30% correction started and ended between March 10th — 25th 2017. It was the first correction following BTCs new ATHs. The graph below depicts what happened during that exact same period to the altcoin market cap.
Altcoin market awakes from the dead.
During the same period of the BTC correction, the altcoin market surged over 75%.
This can be attributed to several BTC hodlers who had now become significantly richer, opting to dabble in a largely ‘unknown’ space. Lo and behold, we all know what happened for the rest of that year.
A closer look at 2017
- Bitcoin breaks ATH’s
- Quality alternative projects such as Ethereum starts to receive attention.
- ICOs are masked as ‘a progression of Bitcoin’ whilst promising quick riches.
- Bitcoin holders start to experiment with altcoin investments in the hope of maximizing returns.
- Altcoin bull-market picks up pace.
What could unravel in 2020/2021?
- Bitcoin breaks ATH’s
- Quality alternative projects start to receive attention and recognition from traditional companies.
- Bitcoin holders start to experiment with ‘quality’ altcoin projects after witnessing sharp gains.
- IEOs (Initial-exchange-offering) are masked as a ‘progression of successful altcoins or previous IEOs’
- Wider media coverage on the crypto market, retail market returns.
- Altcoin bull-market picks up pace.
- 1. “Investors are smarter now, they won’t invest in altcoins” — This is the most common objection I hear against an altcoin surge and an idea that we would all like to believe in a utopian world. However, humans are greedy. Let’s say you’re a Bitcoin investor — you’re a notion of a Bitcoin bull-market was correct, you’ve now got a larger pot of disposable funds. Last time you witnessed a Bitcoin bull-market, you also saw a huge altcoin surge that followed. What’s your mindset going to be knowing that? The above objection is like saying there will never be another recession, it’s naive and short-sighted.
- 2. “Bitcoin will take up most if not all the market share” — Please see answer to objection 1. Human greed. Also, whilst this notion may come to fruition 10–20 years down the line, we’re still very early in the Bitcoin and Altcoin cycle for this to happen.
- 3. “Retail investors have been burnt, they won’t invest in crypto anymore.” — This is simply not true. Investors that looked for ways for getting rich quick will do the same, aka, opportunists. I can write down a huge list of friends that will be looking to get back once Bitcoin gets back to ATHs, and I’m sure you can too.
- 4. “Historical performance is not indicative of future performance.” — This old chestnut, aka, the double-edged sword. Debunking this objection lies in the nascent aspect of this market. Bitcoin is only 10 years old, altcoins are even younger. The market is largely speculative, thus, price-performance is still incredibly sensitive (and attributed to) human emotion, as opposed to ‘human intellect’. Thus, it wouldn’t be far-fetched to say that these historical indicators could be setting a precedent for the price-performance during these ‘early years’
Be frank with your investment decisions.
Bitcoin is the most fundamentally sound cryptocurrency due to its self-fulfilling prophecy as a safe-haven asset. This theory is being re-inforced by the incredibly fragile macroeconomic outlook.
However, we’re talking about a speculative market that does not discriminate based on net-worth, or financial acumen and one that is open to people all over the world. We’re talking about humans being irrational in a nascent market.
I’m personally largely invested in Bitcoin and will continue to be so for the foreseeable future. However, I consider it irresponsible to not have a small portion of your holdings in a handful of altcoins. Because when BTC corrects and ALTs pop: you’ll cash out your precious BTC to altcoins, and be left with less BTC than you would’ve had if you just allocated a small portion of your portfolio to altcoins to begin with.
Be safe. This is not investment advice.
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