Investing in AltCoins


“A bull market is like sex. It feels best just before it ends.” — Barton Biggs, Berkshire Hathaway 2013 Letter to Shareholders

What’s an Altcoin?

An altcoin (stands for alternative coin) is a cryptocurrency that is not Bitcoin. Popular altcoins include ADA (Cardano), ETH (Ethereum), XLM (Stellar Lumens) and LTC (Litecoin).

Why Altcoins? And Why Now?

The stock market is virtually at an all-time-high (ish). Some companies’ shares are trading at ridiculous multiples, such as Tesla’s 1000+ price-to-earnings ratio or Square’s 500+. For the past couple weeks, fears of inflation have put downward pressure on the bond market, driving yields higher, which in turn drove many of these firm’s valuations lower. The S&P 500 is down almost 1% since February, and the NASDAQ is down about 3%.

Marked by a fear of inflation as the economy reopens, the equity markets haven’t been seeing the same exciting returns that drove the retail investor frenzy. It feels like we’re taking one step forward and two steps back, every single day. The downside risk is just so high, and most retail investors like to be long in the market, rather than place risky short positions hoping for a crash.

There is a very real possibility that under these market conditions, retail (and even some institutions) will be making a shift to the still nascent cryptocurrencyThat said, these market market. That said, these times are usually saturated with extreme volatility.

But return-hungry retail traders won’t be looking to add more Bitcoin to their portfolio. After all, for Bitcoin to double in value (and hit roughly $100K), its market capitalization would need to grow by $775 billion. That’s more than 3.5 times Ethereum’s entire market cap, and 18 times Cardano’s. Retail investors will look for the smallest, least mainstream, early-stage crypto projects.

And that’s where you’ll have to look if the stock market and the major cryptocurrencies have been boring you to death. So what are a few examples of altcoins that are well positioned to see an increase in retail demand?

Here are a few I have personally dabbled in, ordered by market cap (which is one measure of risk):

  • Litecoin: this is a major cryptocurrency, and probably carries lower risk than the following two. But its market capitalization is only at $13 billion, and it could easily double in value if the entire crypto market cap grows by another 25%. If Bitcoin is digital gold, Litecoin could become digital silver. Key word: could.

Hedging Risk

When I first invested in altcoins, circa 2016, I quickly realized this was a risk management game. See, altcoins can move rapidly in either direction, and when the prices begin to gain strength, there is a “feedback loop” effect.

There’s a lot of homogeneity in the crypto market, in the sense that investors generally see most coins as somewhat similar to each other, so they will gladly sell one to buy another if it will provide them with a higher return in the short-term. As people see that a coin is going up, they will convert their holdings to catch the upside. This in turn pumps the price even higher.

So, how does one hedge risk in a market saturated by asset bubbles and volatility?

There are 2 major approaches in my view:

1. Only bet what you can afford to lose. You’ve heard this before, but if you’re not planning on selling to capture short-term profits and want to HODL for a while, make sure you’ll be ok if your investment goes down by 50%.

2. De-risk aggressively. This is my approach — I do sometimes place large bets on cryptos. But the way to do this responsibly is to sell the initial capital once the asset has gone up in value by 25% or more. So, if my $10K investment is now worth $12.5K, I’ll be selling the initial $10K to Bitcoin or Ethereum (which I’m bullish on long term), and I’ll keep the remaining $2.5K invested.

Last tip: never buy a coin that just went up by 100% or more unless you’re ready to hold on to it long term. Parabolic moves are often accompanied by downside.

TLDR: If you choose to diversify away from the increasingly scary stock market, altcoins may be worth exploring. Enjoy responsibly. Always remember: after alt season comes salt season ;)

Disclaimer: This is not financial advice and you should always do your own research before investing in any securities or cryptocurrencies. I am not a public equities analyst.