Before the chapter of 2020 ends, I thought of writing my own version of the beginner’s guide to investing in crypto. The lessons here stem from my 3 years experience since my first venture into crypto during early 2017. This is what I would tell myself if I were to start all over again from ground zero.
1. Bitcoin is King of Crypto
Before you get into the crypto world, know that bitcoin is king. It is the FIRST cryptocurrency born out of a crisis and it is till date the longest-lasting crypto that has survived against all odds.
In crypto, first-mover advantage helps as the longer a cryptocurrency is around for, the more secure is its network. This is because attacking the blockchain network becomes exponentially harder as more and more blocks are being mined.
That is one of the main reason why institutions go for bitcoin and not ethereum or other altcoins. Because it is the safest, most secure, has the strongest network and bitcoin has proven its value for more than a decade.
When institutions and ultra-high-net-worth individuals look to hedge against the collapse of fiat, they look to gold, silver and bitcoin. Definitely not ethereum or some random altcoins in the exchange. This narrative is continually growing stronger and will continue to do so in the near future.
And when I mean bitcoin, it is bitcoin. Not bitcoin cash, bitcoin gold, or some other bitcoin hard forks. They are all irrelevant and I wouldn’t bother thinking about them. Bitcoin cash is just a bitcoin variant with bigger block size led by Roger Ver and bitcoin gold has suffered a 51% attack before.
Since bitcoin is the king, the entire crypto market follows its lead. You will seldom see ethereum or altcoins pumping ahead of bitcoin. Usually, it will be bitcoin pumps FIRST, then sideways, before the rest of the altcoins pump and catch up with bitcoin.
Money always flows to bitcoin first, then ethereum and large-cap alts before trickling down to medium and small-cap alts. This is how the cycle or pattern has traditionally played out from my experience.
2. Ethereum is Queen of Altcoins
Definition of altcoins is any cryptocurrency that is not bitcoin
While bitcoin serves to function as hard money, hedge, ethereum differs in its purpose. Ethereum is a platform that allows anyone to build decentralized applications (dApps) and smart contracts on top of it.
Most of the altcoins you see in crypto are being built on the ethereum network. Because why not? That is where all the developer activity, volume, liquidity and interoperability is. The more dApps you have on ethereum, the higher the incentive for others to build on ethereum. You don’t want to be building on a silo chain that doesn’t interact or communicate with the big dApps on ethereum chain.
Similar to bitcoin, ethereum has the first-mover advantage as a blockchain platform for dApps. All the pioneers and large-cap alts come from ethereum and such network effect is something that can’t be forked. Enterprise adoption and big companies like Microsoft, EY are all looking at ethereum as their first choice due to the reasons mentioned above.
All eyes are now on ethereum 2.0 as everyone is gearing up for scalability and widespread adoption. Phase 0 just launched and ethereum staking is already live. Progress of Ethereum 2.0 is striding forward with confidence thus far and CME Ether futures are also launching next year Feb 2021.
Ethereum has a rather attractive risk-reward ratio as it will eventually break to new highs following the footsteps of bitcoin. It is also the FIRST altcoin to receive the rotation of capital when bitcoin peaks and plateaus.
This is exactly what happened during 2017. The pump of ETH from $500 to $1,400 starts around bitcoin’s peak and the same is likely to happen this time around.
3. How to Allocate Crypto Portfolio
Hence if I were to start all over again, my allocation would be 50% bitcoin, 30% ethereum and 20% altcoins. Or maybe 60% bitcoin, 25% ethereum and 15% altcoins. I believe this would give one a good balance of risk and reward rather than being a bitcoin or ethereum maximalist.
The worst you can ever do is to go all-in 100% on altcoins. This is by far the biggest mistake I have made in crypto and I have still not yet recover from the damage. No matter how big or small, you need bitcoins in your allocation. Remember bitcoin is king.
I went heavy on altcoins because my focus was on staking/dividend tokens. Bitcoin and ethereum don’t give you any dividends unless you loan it out or provide liquidity in those DeFi dApps. But you lose custody of it in return.
The problem with altcoins is all cryptocurrencies are paired in BTC. If BTC strengthens, altcoins get rekt since the relative currency power weakens. Hence when BTC pumps, altcoins crash. When BTC crash, altcoins also crash. Only when BTC consolidates, altcoins pump. Altcoins have to suffer to at the whims of bitcoin mood and your portfolio is going to be very volatile.
Not only that, you lose satoshi value, the smallest unit of bitcoin, when bitcoin pumps. While your portfolio value in USD could have increased over the months, you have lesser bitcoins than you had. This is because 1 satoshi is worth more in USD now.
This goes against the school of thought that you should maximise the number of satoshis since all cryptocurrencies are paired in BTC. Hence to protect your satoshis from depreciating fast, it is advisable to have a heavier weighting on bitcoin.
The only time when altcoins strengthen against bitcoin is during an altseason. This is when more money is flowing into alts than bitcoin. When this happens, you will get even more bitcoins since the value of altcoins is worth more in satoshis now.
We have not seen an altseason yet as bitcoin is only at the spring season. But once bitcoin peaks during summer, investors will look elsewhere in search of higher upside gains and that is when altseason starts.
The way we look at this is by using the bitcoin dominance index BTC.D. When bitcoin dominance is down, it gives way for altcoins to pump. When bitcoin dominance is up, altcoins give way for bitcoin to pump. Each has its own rally moment and now it is bitcoin.
4. How to Choose which Altcoins to Invest?
Even though bitcoin is king, you are not going to see a 10x from here. At least not anytime soon. On the other hand, there is a lot of upside potential and developments for alts as their market cap is way smaller. But out of the hundreds, how do you know what alts to look at or buy? Especially when there are no fundamental metrics to look at.
There are a few themes I would classify altcoins to be.
4.1 DeFi Tokens
The first is of course DeFi. DeFi is extremely popular in altcoin and this category makes up the highest volume of transactions in ethereum. Some of the more prominent DeFi tokens are AAVE, UNI, YFI, SNX, COMP, MKR and etc.
Defi Pulse is a good site you can visit to see who are the market leaders in the DeFi space. The total value locked up is $15 billion only and we are just getting started. This is in pale comparison to the trillions of financial assets in the real world. Imagine a conservative 1% of financial assets from the real world coming to DeFi in crypto.
Personally, I hold Kyber Network (KNC) as I find their model sound and sustainable. Don’t ask me about yield farming, I know nothing about it.
4.2 Platform Tokens
The second category is platform tokens. These are the altcoins that want to compete with ethereum by building their own blockchain network. Examples of such are, Cardano (ADA), EOS, TRON, Tezos, NEO, ONT, Zilliqa.
Their utility is the same as ethereum, they want people to build dApps on their platform and each will claim their competitive advantage to ethereum. For example, Zilliqa uses sharding for cheaper and faster transaction. But no one beats ethereum in network effect. I am personally holding ICON (ICX) as their staking yield is among the highest and they are a sound project with government, enterprise connections.
4.3 Exchange Tokens
The third category is exchange tokens. These are the tokens like Binance (BNB), Huobi, OKEx and etc. People buy into BNB because it is akin to being a shareholder of Binance. And Binance is doing token burns monthly based on the volume traded, you can think of it as transferring exchange profits to price gains of BNB since supply is reduced.
However, the trend of buying/selling from centralised exchange is now moving towards decentralised exchange or (DEX). Nobody transfers tokens in and out of exchanges anymore as you can now do a direct swap on those DeFi dApps like Uniswap, Kyberswap and etc. But new retail investors will still use centralised exchange as that is the first point of fiat-to-crypto.
4.4 Oracle Data Tokens
The fourth category is big data. These are the oracles that provide data feed from the traditional world into the crypto parallels. They act as a bridge to open up the possibilities of use cases in dApps. Examples are Chainlink, Band protocol, filecoin, Graph, DIA and etc.
Chainlink is the market leader and dominant player as of now. They are the most widely used oracle solution by leading DeFi projects and they are everywhere.
A total of 130 DeFi projects have integrated with Chainlink or plan to integrate Chainlink oracles and there are 360 partnerships in the ecosystem so far.
When more enterprise and traditional businesses come aboard to the crypto world, big data is required and Chainlink is the one to bet on.
4.5 Card Tokens
And I get this a lot. Why don’t you get Crypto cards? MCO, TenX, Digix gold card and etc. Personally, I don’t buy into crypto card projects for the simple reason of Gresham’s law. It states bad money drives out good. If there are two forms of commodity money in circulation, people would keep the valuable one and spend the less valuable one.
Which do you think is the more valuable one? Bitcoin or fiat?
Here is an example of me trying to buy Mac with bitcoins for the first time. It costs 0.0017 bitcoin at that point in Feb 2019. That 6 pcs nuggets meal is worth $51 today. Meanwhile, the $10 I had in Feb 2019 buys me less stuff today. Is bitcoin or fiat more valuable?
While the experience is fun, I believe people buy crypto for hedging, holding and investing. Not for spending. And these card businesses derive their value based on the volume of transactions. Hence, the future is dim unless we are talking about the spending of stablecoins.
There a lot more categories like payment, privacy, gaming, digital identity but I would say the narrative isn’t that strong. Payment you have XRP, LTC, Stellar, OmiseGO and etc. These are all highly regulated arena and Ripple just got slammed with an SEC lawsuit on XRP today. Privacy coins you have Monero and Zcash, two of the big players. Gaming there is Enjin, Steem and digital identity, Civic, ICX.
5. What Drives Prices of Altcoins?
Unfortunately, what drives the price of altcoins isn’t so much about fundamentals. If not dogecoin wouldn’t have pumped 25% because Elon Musk tweeted it for fun.
Many of the altcoins have noble pursuits of using blockchain to eliminate inefficiencies in the supply chain, digital identity and etc. But yet they don’t see the price action and they remain stagnant despite making progress in developments.
That is because their narrative is weak, the hype is low. Simply no one talks about it. We are not at the stage of widespread adoption and everything is still in the clunky phase of the internet era.
The trending narrative right now is definitely DeFi and Interoperability of blockchains (Polkadot). These coins tend to attract more attention, hype and also capital inflows. It is already useable, feasible and people are starting to loan and borrow money without banks. But such trends in crypto can change fast.
Interestingly, there is a debate that the new 2020 altcoins would outperform the old 2017 bags. Who still remembers NEO, LSK, QTUM, IOTA, ARK? These are the long-gone forgotten giants that have yet to recover from their fall.
Another often-overlooked factor that drives altcoin prices is the strength of the community. Companies with a strong, united and bonded community tend to do better than those that are scattered. Look at Tesla as one good example.
The power of community matters even more in crypto as social metrics and price momentum are highly correlated. Founders who keep social engagement high and community updated also tend to do better. CZ Binance is one good example of a leader that is actively engaging in the community every day.
Last but not least, vet through the fundamentals, technical background and enterprise connections.
5.1 Tokenomics of Altcoins
The next factor to look at for altcoins is tokenomics. Whatever altcoins you pick, there is a supply and a demand. Ideally, you want a strong project that has high demand and low supply.
5.1.1 Supply of Token
The best kinds are those that have a max cap of supply tokens. Bitcoin for example will only have 21m in circulation. You can’t print bitcoin like fiat. Kyber Network KNC also has a max supply which is what I like about it. Having a limit to the supply means your token will increasingly become scarce over time.
Other methods of reducing the supply of tokens are through token burns. BNB is doing that and Kyber Network also has tokens burn. Ethereum 2.0 also has plans to burn ETH in the future. The reason for token burns is to reduce the inflation rate and supply of coins in circulation. When less coins are in circulation, price would increase given all things equal.
Another method of reducing supply is through staking. Many altcoins have staking features and when you stake your tokens, it gets locked up in the smart contract thus reducing the supply of tokens in circulation.
For staking tokens, it is also important to ask where do you get the staking rewards from? Some are just minted out of nowhere for free. Then the next question is what is the inflation rate? How many new tokens are being minted into circulation every year? Hence, you should look at the real yield which is nominal yield – inflation rate.
There are also altcoins that distribute rewards from actual earnings. This is my preferred model as this itself proves that it is a revenue-generating business with actual network usage. Kyber Network is one good example as it earns from network fees and distributed them back to KNC holders in ETH.
5.1.2 Demand of Token
On the other side of the coin, you have demand. The first question to ask is what is the utility or use case of your token? For platform tokens, they usually act like ETH to be used to pay “gas fees” for running on-chain transactions. For others, it might be more ambiguous and questionable. If you can’t ELIM5 to yourself what it is used for, that token probably isn’t a good use case.
For staking tokens, it is important that demand for its utility token far exceed the compounding supply of tokens coming into circulation. Failing to do so in the long-run would turn the token into a worthless currency. Just like what you see in Zimbabwe and Venezuela after excessive printing.
If you wish to delve deeper into the demand and utility of platform tokens, dapp.com is a good site to visit as it breaks down the category of dApps and transaction volume over the past 1 month.
6. Mindset Towards Investing in Crypto
Crypto is a highly volatile asset. But without a doubt, a worthwhile venture. Don’t look at them as useless penny tokens for trading. We have long moved passed that phase. Instead, study the technology of blockchain and look at the innovations of altcoins. Here is a layman’s guide to bitcoin’s whitepaper that I have written a while ago if you are keen.
Crypto is gaining maturity and you would have noticed that institutions and big banks are joining the game. More are coming along and this is the future direction we are heading towards.
We should shift away from the old notions that bitcoin is a scam, it is for money laundering, it has no value, it is tulip mania, for criminals and etc. If all these are true, the value of bitcoin would be $0 a long long time ago.
It is important to realise that these ideas are long outdated and be willing to embrace the new narrative fast. Michael Saylor called bitcoin online gambling in 2013, but he holds more bitcoins than the US government now. JP Morgan called bitcoin a tulip bubble, now predicts a $600b demand from institutions. Goldman does not constitute crypto an asset class and a viable investment rationale, now in rumours of helping Coinbase for their IPO. The list goes on.
Those who are willing to change their ideas towards crypto get rewarded after they embrace it. Don’t be a stubborn bitcoin permabear like Peter Schiff. Just follow the price trend and realise that crypto is now in a spring season.
It is crystal clear that blockchain technology is the future. Banks, Big 4, consulting firms, IT firms, enterprises, institutions, government, countries, everyone top-down are all venturing into it. Why then resist change?
7. Enjoy the Volatility
Nevertheless, be prepared for volatility. Don’t get carried away and think that bitcoin is so bullish that it will just shoot up straight to 25k, 30k. When corrections come, and they will come, it can be scary and you will think crypto is dead again. But every dip sees prices rise higher in an uptrend.
A 10% drop in stock prices might be considered a crash, but in crypto that is only a dip. You can be -15% down for a week and +40% up in the next. We are still fairly small as a market cap (about $600 billion) and that is just the nature of crypto.
And because of the volatility, it is best to go small first until you are comfortable. Then slowly increase your position as you see fit. Start with bitcoin as that is considered the least volatile asset in crypto. There are many high-net-worth individuals who allocate 1-5% of their net worth into bitcoins and I find it to be an extremely sound strategy.
But if you are sucked into the rabbit hole of the tech developments and the innovations, then ethereum and altcoins are the ones to look at. It is also where all the ten-baggers are. But again, high-risk, high-returns. One final word about altcoins is that all holders of whatever altcoins will say theirs are the best. So learn to make the judgement for yourself.
You can start from as low as $50, $100 or any amount you want. There is no concept of a lot size and the crypto market is open 24/7. Here is a useful guide for those who wish to get started and those who already hold crypto but wants to enhance security.
In concluding, there is never a better time to get into crypto. Crypto never fails to surprise us with news and developments, whether positive or negative. There are no waves without wind. So enjoy the volatility.