If you use Telegram, then you know that it is full of crypto gurus who can’t wait to share with you advice on buying the newest and most promising coin that is rocketing to the skies. In this article, we understand why these tips hardly (ahem) worth listening to.
A typical story of Kryptian success sounds something like this: he invested the money he saved at school lunches in time in the most promising new coin, that rocket fired “to the moon”, the investor “made X” – and now he rides through the streets of his native Severodvinsk on a sparkling Lamba.
The crypto investors who cherish these kinds of dreams lovingly call each other “degenama” (yes, you understood correctly what word this abbreviation is derived from). In practice, however, most often they have a slightly different story.
In May 2022, Sam Callahan posted an article Coinbase and the Insider Exchange Dump, which is designed to slightly lift the veil of secrecy and explain the systematically sad turns in the fate of crypto-degens. Let’s try to understand this topic.
Shitcoins – the engine of progress
What does any crypto exchange want? Obviously not that you bought Bitcoins on it, quickly withdrawn it to your cold wallet, and quietly hodlili them until the final victory of the ideals of cypherpunk crypto-anarchy. On the contrary, a crypto exchange, of course, dreams of you constantly and selflessly indulging in crypto trading, thereby providing for it an uninterrupted stream of tasty commissions.
Therefore, crypto-exchanges in every possible way welcome the emergence of new popular cryptocurrencies, which have many times more volatility than boring (by the standards of the crypto world, of course) Bitcoin. More Shieldcoin => higher trading enthusiasm of degens => more greedy commissions settle in the pockets of the exchange itself.
But even if you are not a degen, but just a thoughtful long-term crypto investor, then such a violent variety of different coins should still instill some anxiety in you. What if you have collected the worst coins with a dubious future in your portfolio – while the holders of newfangled HYIP projects receive the most insane profits?
In the end, the “hit parade” of the largest and most successful cryptocurrencies looks quite colorful: every year some new coins break into it – it is obvious that investors in them enjoy the most pleasant “x” in their portfolio!
If you really suffer FOMO-syndrome of lost profits of investing in every new emerging crypto prodigy – then in the next section we will try to get rid of it.
Who can overtake Bitcoin?
Let’s use the example of Coinbase (one of the largest crypto exchanges in the world) to see how profitable the pursuit of the “best” coins is on the long term. Of course, we will compare with the gold standard of the crypto world – with Bitcoin.
First, let’s look at the results of the oldest altcoinswhich started trading on Coinbase before other coins.
As you can see, only Ethereum turned out to be “well done” and was able to overtake Bitcoin – the other three coins almost completely depreciated compared to BTC (by 85–97%).
If you look at those born during high-profile ICO (Initial Coin Offering – the initial issue of coins, the real boom of which occurred in 2017) of cryptocurrencies, their results are also not amazing: the average ICO token since listing on the crypto exchange has lagged behind Bitcoin by 58%.
So, well, if it didn’t work out with ICO rockets, then maybe DeFi-projects (Decentralized Finance – projects designed to provide traditional financial services, but in a decentralized form directly on the blockchain), which experienced a rapid heyday in 2020-2021, did they give heat? Alas, and here the average lag behind Bitcoin since listing is approaching 62%.
Who and why shoes cryptans
Agree, this is very strange: how is it that new (stylish, fashionable and youthful) cryptocurrencies are so massively losing to the old and dull Bitcoin all the time? If your intuition tells you that there were some intrigues of insidious reptilians here, then you are absolutely right!
The following chart can shed some light on what is happening, which shows what share of the entire pool of issued coins is kept by insiders of crypto projects.
As they say: the farther into the forest (by date) – the fatter piece of the pie the insiders leave in their pockets. But they leave, of course, not just “as a keepsake” – but exclusively for subsequent enrichment.
Here is the author articles and hints to us that the listing of new coins on large exchanges like Coinbase is nothing more than the beginning of the process of cashing insiders about ordinary exchange hamsters. Well, the more volume insiders are ready to plant in the stock market glass on the wave of hype, the worse it is for the dynamics of quotations of these coins.
It is interesting that not only the largest retiloids, but also all sorts of smaller animal lizards strive to stick to this process of shoeing hamsters. So, that week the US regulator SEC charged to a former Coinbase employee in insider trading: he, without further ado, bought cryptocurrencies together with his buddies in advance, which were about to get listed on a crypto exchange – thus earning an extra million and a half dollars on jumps in their quotes, which usually occur immediately after listing.
What about index investing?
Here it is necessary to make a reservation that the author original article – a notorious Bitcoin maximalist with burning (literally) eyes, who clearly wants to rig all the facts for the sake of his beloved BTC. Well, you understand – so that Bitcoin alone stands in the center in a white coat, and all the other altcoins shyly squeeze around the corners.
Therefore, it would be nice to check a couple more independent sources. The author himself refers to one of them – this is great study from Jump Crypto, which analyzed a database of over 3,700 cryptocurrencies. And they concluded: when buying new coins when they reach the threshold of at least $20 million in capitalization and hold on the horizon of a year, in 84% of cases the investor gets a worse result than if he hodl bitcoin. At the same time, the average return on this horizon is -14% to Bitcoin, and the median one is -78%.
However, this statistic in itself is not yet a verdict for the idea of crypto-diversification. After all, the famous Bessembinder’s study on the stock market also shows that 96% of stocks collectively barely catch up with the ultra-reliable short-term US Treasury Bills in terms of profitability, and all the “wonderful” results of the stock market are essentially provided by only four percent of the rare “winners”.
But for stocks, this is an argument in the opposite direction: you need to diversify your portfolio as much as possible so as not to miss these 4% of the most vigorous securities on steroids in any case. Maybe the same principle works in the crypto universe: yes, the average altcoin loses to Bitcoin – but collectively they still allow you to get more pleasant returns with less (thanks to diversification) risk?
Alas, seeing S&P’s capitalization-weighted cryptocurrency index doesn’t really support this hypothesis.
From the chart above, it is easy to see that over the past five years, Ethereum and Bitcoin have shown fairly close returns at the level of 47-54% per annum; while the index of all other altcoins of 348 items brought only 14% per annum. Accordingly, an investor who walks Bitcoin earned capital in five years that is 4.5 times higher than the final result of a “passive” investor who diversified invested in all relatively significant altcoins at once.
So it seems that the advice of crypto-infogypsies on choosing the best shieldcoins, charged with inevitable success, is unlikely to help anyone get rich. Well, except for the infogypsies themselves, of course!
If you are really thinking about introducing some cryptocurrency into your passive investment portfolio (at this point in the article, one Sergey Spirin recoiled from the monitor somewhere in sacred horror), then it seems to be better to focus on Bitcoin and Ethereum as coins, looking most viable in the long term.
You’ve probably heard the story: Bitcoin is considered to be a kind of “digital gold” – the asset with the strongest and most established reputation among cryptocurrencies. And Ethereum is, in fact, a kind of distributed computerthe technological platform on which a significant proportion of all other crypto projects are built.
Together, BTC and ETH make up more than half of the capitalization of the entire crypt. And no matter what claims you have to them (I personally have questions about the environmental friendliness of Bitcoin – but this is a topic for a separate article), nevertheless, we must admit: if blockchain technology has a future – in one form or another in this future (at least on the horizon of the next five years), Bitcoin and Ethereum will probably be present.
Do not forget only about the main rule of crypto investments: invest in crypto only the amount of money that you are morally prepared to lose completely, without a trace.
If the article seemed interesting to you, then I will be grateful for subscribing to my Telegram channel RationalAnswerwhere I try to find reasonable approaches to personal finance and investments (well, I dabble a bit in crypto, as you can see).