It’s no secret that [unfortunately] the cryptocurrency and digital asset space is plagued by volatility. This is why I will stand by my mantra that you should allocate less than 10% of your savings/investments/retirement portfolio to cryptocurrency OR only what you’re willing to lose. That way, if everything blows up due to FUD, you’ve only lost 10%. If you’re older, you probably can’t tolerate as much risk and want your crypto holdings to be even smaller than that- I really like Financial Samurai’s Recommended Net Worth Allocations by Age. Thankfully, large caps like Bitcoin and Ethereum have become relatively more stable in recent years thanks to institutional investment and the beginning of society’s adoption of the crypto narrative. Moves of 15% in one day still happen- although with smaller cap coins, those moves can be much, much, bigger. The good news is that Bitcoin & co have averaged a 200% annualized return since inception, so if you can be a warrior and weather the rough storms, there are some insane gains to be made. Keep in mind that the crypto space is extremely young and if you’re here and you’re reading this, you’re an early adopter.
Which cryptocurrencies are the most volatile?
In general, the smallest cryptocurrencies by market cap are those that have the biggest price swings. Most of these coins are newer and fall into the memecoins and shitcoins category of cryptos. This doesn’t mean that there aren’t some legit projects that are early in their journeys that will end up being fantastic investments. Although there are over 9,000 cryptos listed on CoinMarketCap, very few of them have actual real-world adoption (i.e. companies and individuals are gaining economic value from their networks or platforms). It’s essential to learn as much as possible about any projects you invest in- are the founders smart people? Could the technology realistically have a real-world use case? If you want to compare the volatilities of different coins, this tracker at ShuffleUp can give you a better idea of how volatile the different coins are.
Stop investing in memecoins and shitcoins
If a study were performed on how many investors have profited off of each coin, I can guarantee you that the coins with the smallest percentage of winners and largest proportion of losers would be with memecoins and shitcoins. I’m talking about things like Baby Doge, Teen Doge, Shiba Inu, Diarrhea Coin, and more. A lot of crypto sceptics make the argument that cryptocurrencies are worthless- and if they’re talking about memecoins and shitcoins, they’re probably right. Here are a few of the problems and commonalities with shitcoins:
- Their founders hold very large shares of the coin supply, and thus have heavy incentive to sell when there are large price increases leaving you ‘holding the bag’
- The coin has demonstrated pump & dump behavior in the past
- The coin/network has nothing special to offer and no competitive advantage
- The individual coin’s value are small fractions of a dollar (i.e. $0.00000214), leading you to falsely believe that the coin is undervalued and that if [insert shitcoin] just reaches $1 you’ll be a millionaire!
In the world of investing ‘risk’ is a one syllable fancy way of saying “you’re going to lose your money.” Risk and volatility are heaviest with coins that have on intrinsic value like these shitcoins.
Crypto options and leverage are the most volatile investments in the space
Since I’m not an options genius and I’ve forgotten 90% of what I learned in the MBA program I paid top dollar for, I cannot give you a comprehensive on options trading. What you need to know is that yes, options trading is available to do on some crypto exchanges and it’s a real roulette wheel. It’s guaranteed the fastest way to either wreck you or bring you insane gains. Call options (“calls”) are when you’re gambling that the price of a coin is going to appreciate- put options (“puts”) are when you’re gambling the price will depreciate. Studies have shown that most people that deal in options trading get wrecked and are left with nothing. My life experience has shown me that I got wrecked trading options in my brokerage account in early 2021 when tech stocks went in the gutter. Crypto investing is already throwing a tank of gasoline on a fire- crypto options and leverage is throwing 100 tanks of gas on a fire.
The crypto space is still majority-speculative
The only thing that will sustainably raise the value of cryptocurrencies over the long run is real-world adoption of crypto networks, platforms, and decentralized applications (dApps). Thankfully, this is already in motion. dApps on different platforms like Ethereum and Binance Smartchain have millions of daily active users- payment networks like Stellar are currently being used for cross-border transactions. Unfortunately relative to the value of the entire crypto market right now ($2.1 trillion), I believe the market is too speculative given only a small percentage of cryptos have this real world adoption.
In the stock market, analysts on Wall Street have traditional methods for valuing stocks that are tried and true- what dividends does the company pay? Does the company have strong growth prospects and a good balance sheet? We can’t do this with cryptos, because they don’t pay dividends, at least not in the traditional sense. Most funding crypto projects have received and their balance sheets are not available to the public. Since the technology is only a decade old, we have zero precedent for its growth prospects. Based on these truths and depending on who you ask, cryptocurrencies could be severely undervalued or way overhyped. The truth is probably gray [like everything]- some coins have huge potential and others are duds.
Invest in what you believe
If you’re a crypto investor, I hope you’re like me in that you think blockchain and decentralized have a place in the future. I think that relative to the level of adoption and usage and economic value they will provide to the world in the future, some of these projects like Bitcoin and Ethereum and Cardano are severely undervalued, still. Invest according to your ideals- when the dips and the bad times come, it will be those ideals that strengthen your resolve and give you the will to HODL. And as we’ve seen time and again in the crypto space- to the HODLers go the spoils.