Objection #2: You heard some altcoin is better than Bitcoin
Novice Bitcoin traders want to be above-average investors. Of course, we can’t all be above average. But many nonetheless try to add some extra alpha
to their portfolio by buying a hot new coin or timing the market.
Those familiar with the efficient market hypothesis
understand the difficulty of consistently beating the market. The prices of assets reflect all current information known by participants. Unless you can consistently evaluate the fundamental value of assets more accurately than others, you won’t beat the average. When you try to time the market, your emotions work against you, urging you to buy after an asset goes up, and sell when the asset is low.
Of course, if you invest in Bitcoin, you’re already disagreeing with the vast majority of investors who have little or no exposure to it. Why not disagree a little more and buy some altcoins? Here is the difference:
Bitcoin has a simple business model (“Hard Money You Can’t F*ck With
”) and a 12-year track record. Altcoins are all either a technical variation on Bitcoin (fba
vs proof of work, or dag vs blockchain
) or an entirely different business model (smart contracts). It’s much more difficult to understand the technical merit and value proposition of these assets. None have Bitcoin’s track record.
As a managing partner of a cryptocurrency hedge fund, it is my full-time job to research and write about cryptocurrencies. Yet the vast majority of my crypto portfolio is in Bitcoin because I do not feel qualified to judge the technical merits of various projects. I have a background of 17 years in software development and architecture. I personally designed a Bitcoin exchange. Do you think you can do better based on YouTube and Twitter personalities?
For example, even if Dash is technically better than Bitcoin, is it going to beat Bitcoin’s network effects? What’s to stop Bitcoin from adding whatever killer feature Dash offers? Are you qualified to make these judgments, or are you buying based on the rumor mill?
If you are personally involved in a crypto project, I understand your decision to invest. But don’t expect to beat Bitcoin based on scrolling crypto news sites.
Objection #3: You want to be a crypto trader
Once you master the advanced trading screen, you feel like you have the key to mastering the markets. By taking a few online courses, you can develop a unique system that consistently earns you profits. During a bull run, when everything is going up, it’s easy to conclude that you are in fact a pro.
It is possible to earn a consistent edge in crypto - just not by you. Crypto markets are manipulated by whales (big traders) with powerful marketing machines. There is no way to predict their actions, but they will use your emotions against you. They also pay lower trading fees than you, while your profits are eaten up by fees.
Objection #4: You want to diversify your crypto portfolio
One of the main reasons people hold a basket of crypto assets is that they don’t know which will be successful in the long run. This is a reasonable concern. In practice, however, choosing which assets should go into your portfolio is very difficult.
The principle behind diversification is that by holding uncorrelated assets, you can reduce the volatility of your portfolio while maintaining the rate of return. Diversification works great for the stock market because the profit margin tends to be the same across different sectors. Also, the stock market has 120+ years of precedent to predict future trends.
The same isn’t true of the cryptocurrency market. The price of crypto is based almost entirely on anticipation of future demand, not current demand. Bitcoin’s price depends much more on speculation than current demand as money. Furthermore, money is a natural monopoly, so it’s likely that only a single coin will emerge dominant. (Likewise for smart contract platforms.)
If we assume that a single asset will emerge dominant, which one do we choose? One option is to look at the total market capitalization of each coin (hence CoinMarketCap.com being the #1 crypto site). But this is misleading. If I create a token called “Veksler Coin” with a supply of 1 billion and sell a single coin to my friend for $1, I instantly have a $1 billion dollar market cap with a $1 inflow. MarketCap rankings are key for adoption, so there is extremely strong pressure to manipulate them. Even though Bitcoin has less than a 50% market cap, the vast majority of fiat inflows go to Bitcoin
. In short, there is no reliable metric for market capitalization.