The crypto markets are inundated with a constant stream of new altcoins. Everybody and their grandmother is whipping up whitepapers, raising millions of dollars in ICOs and flooding the markets with tokens.
It’s becoming obvious that we’re in another tech bubble similar to the dotcom bubble of the 90’s, except the barrier to entry for investors is much lower in crypto. For smart money there’s a lot of profit to be made in this industry. That said, there are many pitfalls in crypto that make penny stocks seem like triple A investments.
Some blockchain projects offer innovation, while others are just clone coins from script kiddies trying to get rich on pump and dump schemes. Most altcoins will likely lose value over the long run. Speculators tend to abandon yesterday’s darling for the latest hype. Effective traders lock in profits once they’re ahead, while the rest are left holding a bag of crypto trinkets. One day these blockchain relics might make good souvenirs to show your grandchildren.
The ICO Bubble
ICOs are the cash cow of crypto. They stand for “initial coin offering” and are a way for programmers to crowdfund open-source blockchain development. Many of these projects manage to raise millions of dollars over the course of a few weeks, and speculators are eager to buy because the returns can be ridiculous.
The ICO model is one where developers get paid for an idea before even putting in the work. The interesting thing about crowdfunding is that it’s an example of capital being raised quickly in a decentralized manner.
Traders who get in on the right ICO can buy cheap tokens and sometimes sell them for returns as high as 1000% during price discovery. LISK was an example of a token that initially traded at 400% above the ICO price. The fact that anyone would pay 400% more for a token they could have bought a couple of months earlier in an ICO, is a testament that these markets are driven by dumb money.
Although ICOs can be profitable, they take away value from other markets. Usually ICOs raise funds by accepting other coins, which pulls liquidity off the exchanges. ICOs can also increase selling pressure on these markets when developers cash out to pay for expenses. There are traders who also liquidate some of their altcoins in order to invest in new projects.
Diluting the crypto markets with a flood of new tokens is another form of inflation. There’s only so much liquidity that’s available on the exchanges and each coin competes for market share. There’s usually an obvious shift in trading volume when new coins become the hot market.
Altcoin Market History
The blockchain industry is relatively new, yet we can still sample some of the hot altcoin markets from 2013-2014. Many of the early altcoins are either dead or have lost a significant amount of value. There are hundreds of coins that no longer have active blockchains, development or communities.
Although it’s possible to make money trading illiquid coins that get pumped, the purpose of this article is to look at these coins for their longer term investment value.
Litecoin is one of the earliest cryptocurrencies and was considered the silver to bitcoin’s gold. The LTC markets were correlated to bitcoin and managed to increase 3400% during the bubble of 2013. Since that time litecoin has lost 92.5% of its dollar value.
Bitcoin also took a big price hit but the difference is that it managed to recover a large portion on a year long bull trend. BTC is currently down 42% from its parabolic peak, yet it made a great investment at most price points in its 8 year history.
Although the litecoin markets are relatively uneventful to trade, it’s still one of the most successful early coins because it ranks #4 for market cap, has the highest altcoin hash rate and maintains millions in daily trading volume.
Bitshares was the “crypto 2.0” of its day and is a project that invented the concept of DAOs (decentralized autonomous organization). The idea was revolutionary yet the BTS markets have been on a perpetual downtrend, losing 94% of its value.
NXT is another “2.0” altcoin that offers many innovative features such as a decentralized asset exchange, encrypted messaging, voting system and DNS registration.
With all these interesting features and a fixed deflationary token supply, you would think that NXT would keep its value. Aside from the short lived Ardor pump, NXT has been on a long downtrend and lost 90% of its value.
These are just a few examples of some “hot altcoins” that lost most of their value over the years. There may be exceptions where certain coins perform well over the long haul but these are rare. DASH is an example of a coin that managed to recover its value and XMR has actually made price gains.
Overall, altcoins tend to be better markets to trade than to invest in. Traders who lock in profit while they’re ahead can produce much nicer returns than those who buy and hold.
Bitcoin is generally considered to be the gold standard of crypto, due to its liquidity and network security. It’s also proven to be a long term store of value and the primary currency for trading altcoins. Some coins are inversely correlated to bitcoin, which can act as a hedge during price corrections and downtrends.