You’re hearing a lot about altcoins from bitmojis, analysts, and commentators.
None of them are experts, but they’ve picked up some insights along the way. Since the market’s going up, they seem legit.
Read on for two truths you might not realize and one lie you might believe.
Truth #1—altcoins are $200 billion worth of crap
Altcoins are a $400 billion asset class. At least $200 billion worth of that market cap consists of altcoins that suck, do nothing, and will bleed value forever. Some of them are outright scams.
The rest will form the foundations of the financial networks of the future.
For all of the bitcoin forks, meme coins, Ponzi schemes, and exchange tokens floating around the cryptosphere, you have a lot of innovative technologies and businesses building great products and services.
They probably make up about 50% of the market. Most do not appear in the top 100.
You may think this means the crypto bubble has a lot more popping to do.
I guess that depends on how you look at it.
If people move $200 billion from dead altcoins to good altcoins, does that count as “the bubble popped?” The total market cap remains the same but lots of altcoins go to zero.
In any event, why do we assume market cap is a valid measure of an altcoin’s value? It’s just the number you get when you multiply the number of coins by the price of one token. It’s fair to question whether this matters for altcoins.
For example, if 99% of a project’s tokens are held by people who died, don’t care, lost their keys, or gave up on the project, that means 99% of the tokens are off the market, possibly forever. They’re more like unissued shares of stock, which do not get counted when calculating the market caps of publicly-traded companies.
Yet they’re included in the market cap of altcoins. It’s a massive distortion that makes the market cap look huge.
Imagine if General Motors created one billion GM tokens, sold ten tokens to a Buick dealer for $100 each, and then claimed its token had a $100 billion market cap*.* It’s a true statement, but not very helpful.
Truth #2—If an altcoin’s down 90%, it can go down another 90%
Did you know altcoins can go down 90% after going up 90%, too?
Every altcoin can drop 90% at any time. Most will drop 100% over time. Some will go up 1,000% or more.
For any altcoin that fails, you’re going to lose 100% anyway, no matter what the price is when you buy it. For any altcoin that succeeds and captures value from its success, you’re going to come out way ahead.
You get a better deal after the 90% drop.
Lie #1–somebody knows what altcoins will succeed
Cryptocurrency as a technology is barely a decade old. Is that enough time for anybody to develop the technical, financial, operational, and tokenomic expertise necessary to accurately assess the potential of these projects?
We can't even agree on what's a good valuation metric. Total value locked? Fully diluted value? Cash flow? Market cap? Something else?
Forget about people who say they have a super-secret scoop on the next hot altcoin.
Instead, find good projects and read solid, unbiased analysis. These projects may not all succeed, but they are all legit, small, and solving important problems in interesting ways.
Some of my rules of thumb:
Governance tokens do not necessarily gain value from the growth of their protocols. Their demand comes from an interest in participating in protocol decisions. Often, these tokens have a few huge holders who essentially dictate the decisions to the rest of the network.
Exchange tokens are basically loyalty/reward programs. Exchanges can change the rules, function, and supply at any time. If the exchange fails, your tokens are worthless. If the exchange succeeds, there’s no reason to think that growth will boost the value of your tokens.
With many DeFi tokens, speculators subsidize a tokenomic scheme that generates yield on assets but does not necessarily drive value to the DeFi token itself. There’s a lot of diversity in form, function, and flow of value. Sometimes I wonder if it's even worth putting all decentralized financial protocols in the same category.
Most DAOs are neither decentralized, autonomous, nor organized. Treat each one as its own asset with its own rules and structure. At the same time, don't underestimate the power of community. Money is a social construct and network effects matter a lot even if the DAO itself seems dumb or useless.