Laying The Foundation

Going back and studying the data of previous bull markets is a great way to gain some insight and understanding into the performance of particular altcoins. Obviously, newer altcoins don’t have this history to refer to. However, there are quite a number of coins that date back as far as the 2017 bull market, which helps to discern the health and future of these particular altcoins, and the projects they represent.

The most important aspect to identify is whether or not the altcoin in question experienced parabolic gains during the course of both consecutive bull markets. An altcoin that performed relatively well in 2017, but was unable to match that performance in 2021 is a bit of a concern. This is the very reason why I am quite bullish in regard to Cardano. Even though Cardano experienced significant gains in 2017, it went on to replicate this performance in 2021.

It’s not often that an already-established altcoin goes on to produce a 100X return. Cardano actually managed to outperform the abovementioned return and was one of the few altcoins to garner momentous attention during the course of the 2021 bull market. A project that was unable to reach its previous all-time high during the course of 2021 is immediately a red flag for me. Even a 2X or 3X appreciation in price is not too convincing, in my opinion.

Ideally, I would require some additional “selling points” and conviction in order to consider such a coin. If you are seeing such a modest appreciation in value and market cap, it would make a lot more sense to simply go with Bitcoin. At the end of the day, it’s not nearly as risky, and there is a much higher likelihood of appreciation. It’s rather foolish to take on additional risk if it is not accompanied by the possibility of a higher reward.

Simple Ratio

This is at the heart of altcoin investing. The potential reward must be relative to the risk profile. It’s pointless investing in a high-risk altcoin that might not even outperform Bitcoin. When this ratio no longer makes sense, chances are a shift has occurred. A shift from investing to gambling. That being said, sometimes a gamble pays off. However, minimal capital should be allocated to such “investments”.

Making use of a strategy that is similar to dollar-cost averaging is a much safer approach to altcoin investing. The only difference to this strategy is that further allocation is only executed once the price has moved considerably higher than your entry, or average price. In this way, you are protected from over-capitalizing on a losing investment. It’s very much a case of adding to your winners while cutting your losses.

Many investors keep buying the dip on altcoins that are consistently edging lower. It is important to note that certain projects will continually trade lower because they are dying. Unless the altcoin is a relatively established project with future potential, it is better to rather increase allocation once your initial investment is in the green. Ideally, buying the dips once the initial investment is safely in profit.

Final Thoughts

It’s important to remember that many altcoins are going to die, as well as become stagnant. Choosing to engage in solid practices of risk management is extremely important when dealing with altcoins, especially micro-caps. Make sure to exhaust the process of due diligence, as opposed to seeing your capital being exhausted by poor decisions.

It can be a difficult “game” to play. However, carefully thought-out decisions made under the oversight of effective risk management have a higher likelihood of success. Catch you next time!