Why Bother with Altcoin Investments?

February 3, 2023 Profitable Investing Tips

In the beginning of the crypto world there was Bitcoin. That was in 2008. By 2013 there were another ten cryptocurrencies and by early 2015 Ethereum was launched and we had the beginnings of decentralized finance and smart contracts. After fifteen years Bitcoin is still the dominant crypto currency and all others are bunched together under the name altcoins. Since cryptocurrencies pretty much all move up and down in value as a group, why bother with altcoin investments instead of just sticking with Bitcoin?

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What Is an Altcoin?

In the beginning altcoin referred to any and all cryptocurrencies other than Bitcoin. Today in the depths of crypto winter Bitcoin holds more than 41% of total crypto market capitalization followed by Ether at just over 17%. Taken as a group, all stablecoins hold just over 12% of crypto market capitalization. Because Ethereum has the second largest market cap with its Ether token some folks say altcoins are everything crypto except Bitcoin and Ether.

Why Own Altcoins Instead of Bitcoin (or Ether)?

Why would someone want to buy some new, unknown, cryptocurrency instead of buying Bitcoin. One reason is cost. Folks who got in on the ground floor bought Bitcoin for pennies and it did not gain parity with the dollar until around 2013. Today, even after a series of lower price plateaus, one Bitcoin is worth more than $20,000 while there are new altcoins that go for pennies each. There are even tokens of bankrupt crypto exchanges like FTX that are much cheaper than Bitcoin ($1.97) and hold the potential for a rebound. This has to do with either buying crypto and holding in hopes of long term gains or buying and selling as one times the market. There is a good case for buying a new token that has the potential to grow in value quickly and more rapidly than more established tokens like Bitcoin and Ether. There probably is not a case for thinking that a brand new token will one day hold the same value as Bitcoin.

Investing in Crypto Because of Decentralized Finance or NFTs or the Metaverse

If you follow us on Profitable Investing Tips, you probably know that we believe the long term value of any and all crypto currencies will depend on their usefulness in the worlds of decentralized finance, non-fungible tokens, or the Metaverse. The blockchain itself will have many uses not related to cryptocurrencies. Long term investors use a concept called intrinsic value to determine whether to buy or sell stocks. One assesses forward looking earnings to see if a company’s business plan is likely to generate profits into the distant future. Then one uses a simple formula to see if the stock’s intrinsic value is more or less than its current market price.

History Lesson for the Crypto World

Back in the 1920s in the runup to the worst market crash ever in 1929 to 1932 it was common to “play the stock market.” Stocks “always went up” until they didn’t, and the market lost 90% of its value before the plunge was over. In our opinion an awful lot of people in recent years were “playing” the crypto market because the mantra was that crypto would always go up. Crypto was separate from the traditional financial system, a hedge against inflation, and a safe haven for assets when the world slipped into chaos like the war in Ukraine. All of that has turned out to have been hype. Bitcoin and the rest fell along with Nasdaq and then fell more each time another crypto exchange went bankrupt.

What Will the Crypto Renaissance Look Like?

When any investment asset takes a nosedive it is just as easy to pile on and find reasons why they failed as it is to hype every crypto exchange in sight when things are going well. There is no question in our mind that Bitcoin, Ethereum and the vast majority of altcoins will survive. But there are lessons to be learned from history. Going into the dot com bubble and crash, pretty much any company with dot com in their name attracted investments and the vast majority went out of business after the crash because they had no viable business plan. One company that weathered the dot com crash storm was Amazon.com because they had a business plan that made money. Today they are one of the biggest companies in the world by market cap. The question today for investors in cryptocurrencies is which tokens, Bitcoins, Ethereum, Altcoins, and which enterprises have intrinsic value in the evolving worlds of decentralized finance, blockchain gaming, NFTs, or the Metaverse. Which are well managed, transparent, and not actively committing fraud. In this regard you may wish to consider how their business activities will stand up to coming regulatory scrutiny as well.