Today I’m going to talk about the similarities of crypto and more traditional markets – with a few key differences. These differences drastically change the way you need to handle your crypto investments.
What an interesting 18 months we’ve had – All time highs, devastating falls (down 99+% in some cases), scams still being launched, existing scams discovered – and now we have a new bull run starting and with it the usual shit that accompanies it. I think I heard the best quote that sums up the last 2 years of Crypto from Aaron Ting from Access Malaysia during the Malaysian Block Week.
“There are so many professors, crypto-experts, DLT experts, BTC mining experts all with impressive resumes and giving talks about all they know – but where were all these impressive people 2 years ago? We never saw or heard of them until 2017!”
I’m paraphrasing but im sure you get the point. I think 2019 will be more cautiously optimistic than the rampant greed we saw in 2017.
So what’s the point of me talking about this? Compared to traditional markets crypto is still the wild west – yes we are seeing more regulation coming in, there are still a lot less than moral activities going on. This is no different to traditional markets (Nick Leeson – 1995, 1987, GFC, etc etc) Just like the rises and falls – the rate of immoral behaviour is higher. So both the natural business cycle as well as the ‘hype cycle’ is much faster and more frequent in crypto — companies go in and out of business faster (or in crypto’s case get funded… and run out of funding), and less than reputable projects are more frequent. All markets go through their rises and falls, some slow, some quick but they all go through it. Crypto is just like a more traditional market like the NYSE but at 10x the pace – the rate at which companies can be created, rise, and fall into oblivion is sped up as if watching a stop motion video.
A unique aspect of cryptocurrency is how ridiculously easy it is to create, promote and launch an ICO/IEO compared to doing an IPO. Perhaps the fundraising side is a bit harder (understatement) than it was in December/January of 2017/2018, however the underlying process – technology wise has gotten even easier. What this means is there is a continual stream of new projects joining the already quite significant number of available tokens/coins. Also interesting to note is that there is a continual stream of tokens that are leaving the market – projects that have already gone to 0, have no trading volume and are no longer listed on exchanges. Does this greatly affect the market cap? No because while projects are draining value and exiting the market, there are more projects entering with fresh investments adding to the estimated market cap rising as hype takes over… then tanking back below the top 100.
This is why HODLing doesn’t work.
At the moment the Cryptocurrency space is made up of over 5000 coins (most projects are not listed on CMC), probably by the time I publish this it will be higher. There are some amazing projects in this group – many of which will float to the top 50/ top 100, many more will be raised up by hype and will equally get smashed down when their insane promises are proven false and market sentiment turns.
I’ve created the spreadsheet here to show the path of the top 31 Cryptocurrencies for 2016/ 17/ 18 (snapshots from early September of each year). I’ve recently added another column for June 2019 (I originally did this research in September 2018) Yellow indicates that the coin hasn’t fallen out of the top 31 since reaching it, dark green indicates that the coin has moved from 2016-2017 but not 2018, light green indicates it has come in in 2017, but fell in 2018/2019 red text indicates the coin has fallen out of the top 100, and a Red box means the coin is dead. The data can be summarised as:
58% of coins carried from the top 31 from 2016 to 2017
42% survived from 2016 to 2018, 32% to 2019
42% of top 30 coins in 2016 and 13% from 2017 are no longer in the top 100
6% of coins in the top 30 from 2016 are now dead, same in 2017
Assuming we have a trading account of $50,000, we can take 3 Gold Contracts which would give us an overall risk of about 7% of our portfolio. This is usually a bit high, however double bottoms are statistically one of the better forming indicators on this market so I would be happy to take a slightly higher risk to take 3 contracts rather than only 2.
Similar chart, however just for the top 10 – Only BTC, LTC, XRP and ETH have remained in the top 10 since 2016…
If we look into coins that have fallen out since 2017 – although 2 have died, many of the coins that have fallen out of the top 31, have managed to stay in the top 100… meaning that perhaps there are less shitty projects being created… OR that because they have managed to raise SIGNIFICANTLY more capital than they could before 2017… that it will just take them longer to die. After working in crypto in 2017/2018, I think the latter is significantly more likely than the former.
Ok so to emphasise the point of this whole article – lets jump over to the Dow Jones Index to compare how much movement occurs.
The total shift in companies over a 10 year period from 1999 to 2018 was only 12 of 30 companies. Meaning 60% survived over a 10 year period, for fun, I also looked at the Dow Jones index from 100 years ago – not surprisingly there are 0 companies that are still in the index today (either through acquisition or mergers) and 27% are completely non-existent anymore (liquidation, not bought or merged)
This is standard practice in the business world – Large businesses get complacent, and are then attacked by smaller, more agile competitors until they either adapt and maintain market share, or are slowly eaten away by competition. It also interesting to note that the vast majority of the 27% businesses that are completely dead are railroad companies – that failed to adapt to a world where rail was no longer the latest and greatest in transport options. We’ve seen this happen much faster during the dot com boom – as even successful businesses have been unable to maintain dominance and its cost them billions (read: Yahoo) then during the social media boom/amalgamation many companies that had plenty of users and revenue were unable to maintain dominance and/or relevance. The same will happen in the crypto space – as the technology is updated and evolved there will be businesses that will keep up and those that won’t – some by luck others by incompetence. For even more fun – I looked at the change in the DJ 30 over 12 months… there was NO change… it looks exactly the same now (even the order) than it did a year ago.
So what’s the takeaway from this? You need to be ruthless with your crypto investments – the idea of sitting back, HODLing and waiting to be a millionaire is one that will see you lose the majority of your capital – The wave of being an effortless bitcoin millionaire is over – to get the kind of growth current ‘bitcoin millionaires’ enjoy, $5 Jan 2012, to say $5k BTC in 2017/18 – thats a 1000x return over 5 years – so if you bought BTC last month you’d need BTC to hit $5,000,000 per coin to make a similar return, and goodluck having the guts to hang on for the whole ride. There’s a reason that most news reports of people making it big in BTC are people who forgot they had it, or only realised what it was worth after they threw their hard-drives with private-keys in the bin.
If you’re not one already, you’re not easily going to be a Bitcoin Millionaire… Effortlessly anyway.
Statistically speaking – if you hold the top 31 coins – the drop off of projects averages at about 40% per year – the top 10 roughly 20% Per year.
I’ve said this in other articles I’ve written, and I bang it out at every conference I speak at – set targets when you are willing to take cash off the table, and set downside risk limits to get out when something falls. The first part (taking profits) is the most important – there is nothing worse than watching something go from a 1000% profit to a 50% loss (Read: TRX, XVG). This is still a market to get in, and get your initial investment off the table ASAP – I’m sure anyone that’s still in Crypto that got in between November and January would understand this lesson.
There will always be exceptions to this, I have no doubt that there will be some other random token/coin in the future that will go from 0.00001c to $50 over a few years and make all the brave folk that bought in at the start and held through the brain-killing pressure of the journey from 0.00001c to $50 that will buy a Lambo – but the number of coins/tokens that do that will be able to be counted on 1 hand, as will the number of investors that hold for that entire journey.