The Concept of Alt Coin Investment

Dear Readers,

At first sight, you might be thinking the title is a contradiction in terms. It’s certainly a provocative title, given that most view alt trading as little more than gambling. And yet the idea here is to provoke a little thought. In my opinion, there are a few reasons as to why buying alt coins can be thought an investment. This article will explore those reasons, namely being the diminishing returns in the Bitcoin market, the relative perceptions involved with trading and investing, and the idea of postponed or delayed returns.

Diminishing Returns

The great problematic facing any Bitcoin investor today is that of diminishing or reducing returns. Looking at the chart, and specifically the ROI [return on investment] as encapsulated in the logarithmic scale on the vertical axis, one can see this effect at work over time. Where earlier investments led to astronomical returns [if some profit were taken], later investments, though good, were not nearly on the same scale. Going forward and extrapolating the trend, something of the same can be expected [insofar as you base those expectations on the chart/ LGC model]. The problem here is that if wanting to sit on a position for an investment, the returns are likely to be less than previously when accounting for both a bull market and its correction. Add to this the notion of time preference, where a person with high time preference looks to take profits and enjoy real assets at an earlier date [compared to those with low time preference], and that reduced expectation on the return becomes a weightier factor in making investment decisions. Even those with a lower time preference still need to have some strategy for taking profit unless of course they have no time preference at all [an extreme position where all values are digitalized in cyber space].

The chart above shows price development along the lines of a logarithmic growth curve. At first sight it may seem a little scary with the 100K line projected well out to 2029, but keep in mind that this is the base of the curve, sustainable price below which any correction could not go [according to the LGC model]. Given the upper line of the channel, price may exceed that base price by up to 4x [400K]. Also, given the inflection point of the LGC curve, due to annual depreciation of USD, prices can also be expected to exceed these lines at that later date.

Also shown here is the diminishing return as it relates to time. Every 10x layer [as it relates to the base of the sustainable curve] involves just over one and a half times the time lapsed for the previous layer [62/ 38 = 1.63]. Keeping time as a constant on the horizontal [as opposed to converting to log] also helps to remind us that time is the ultimate scarcity - at some point profit has to be taken so as to enjoy material wealth in this life [the time preference factor].

The chart also shows the likelihood of a serious correction following on from the next run-up. If the run-up were to be more modest on the basis of diminishing returns, and if that run-up were also to involve a relatively solid correction, then there is the added motivation to take profit on a portion of one’s BTC investment. And yet one wants to stay long that investment. What if there were a middle way? I’ll argue there is via an alt investment that also functions to ‘leverage’ market volatility and one’s potential return.

Relative Perceptions involved with Trading and Investing

Coming back to the point made at the start that alt trading is akin to gambling, I’d suggest that not all alt trading is created equal. First there are various kinds of trading - leveraged day-trading and near gambling at one end of the spectrum, and what I would classify as near investment at the other end.

If time were to be placed on a spectrum, with the shortest of periods at one end and the longest of periods at the other, randomness and possibility would belong to the shortest periods, while pattern and probability would belong to the longest periods. There would be varying degrees of probability/ randomness depending on what point of the spectrum you were dealing with - at the one end, minutes would be near completely random, at the other end, years would have a much higher degree of probability. Just as with any science, where momentary observations only start to make sense when accumulated into a mass over a longer period of time, so too with T.A. It applies most effectively to longer time frames, where lines might be drawn, and trends discerned.

Some have practically demonized the activity of trading alts, and often under the guise of a puritanism. Yet often there has also been an agenda at work here where the fervent believer in Bitcoin wants to see all investment [and speculation] go into BTC. Personally, I half agree with this in that a solid chunk of your liquid worth should be in BTC [the ‘centrist’ position] while I also half disagree insofar as not all your liquid worth should be in BTC - from the pragmatic investor’s perspective, you always need to stay hedged. And one way of both staying hedged and taking profits is to trade/ invest in the alts. Notice here that the activities of trading/ investing are now ‘bordering’ each other and complementary, and not so ‘antithetical’.

By its nature, trading in the Crypto space lends itself to short-term trading. Given the culture of this high time preference, where one’s perceptions can almost get locked into a perma-present state of mind, the longer-term trade, the cyclical trade, must appear as something like an investment. Of course, in traditional markets, investments have a much lower time preference often involving a decade, or decades. But in the Crypto sphere, a longer-term trade involving a few years takes on all the proportions of an investment. For those that are habituated to thinking in terms of short-term trades, this must almost be a paradigm shift.

Now with an investment in mind, the buyer of a major alt establishes a risk-managed position at what is thought to the bottom, or near bottom, of the market. The idea is to ride this position up over a couple of years and sell into a manic market. The rationale of the trade come investment is the extra volatility that is expected to come with the trade, where taking profit is all about maximizing this volatility. In short, the investor has something to sell, and also has the luxury of continuing to sit on his core BTC [the traditional investor’s time preference… if not the digital gold bug’s one]. It potentially becomes the win/ win outcome of a more strategic approach, especially when you consider the likelihood of yet another correction setting in at some point in the future after a bull run.

Postponed Returns

Having mentioned a strategy for taking profits while staying long BTC, it remains to continue with the theme of time and how that profit-taking is postponed or delayed in comparison to the usual expectation involved with trading. This is where one really can say that the longer-term trade takes on all the dimensions of an investment, for an investment is about postponing a gain in the present [or near present] for a much better one in the future. What can psychologically cost us in a difficult and anxious present, as we make our investments only to see them go under for a bit, is matched by the potential to see huge gains easily clocking up as those lower bought positions ride a manic market upward [keep in mind that entry levels are crucial here for those potential large gains at the top….as they say, no risk no reward].

Given also the investment nature of some of your alt trades, they should be allowed to be more tolerant of volatility in my opinion. Their rationale is not to make that quick profit of a swing trade or a day trade [both of which can complement your investments] but to get a position established on the board for that longer cyclical multi-year term.

And to finish with a chart comparison between a more major alt and BTC in order to illustrate the extra potential of an alt investment. I’ve chosen LINK for the example, but it could be any of a number of different coins. The point of the chart comparison is not its specific detail [given I lack the black art of clairvoyance] but its general idea. It is a sketch or projection in terms of ROI [return on investment] of an alt as comparable to BTC. Both are charted against their natural partner in volatility - USD.

LINK/ USD

A breakout of the range, and where an obvious technical buy would’ve been. A series of higher highs and lows looking likely to be put in, and a relatively conservative target of a 10x return from that technical entry [in order to compare with BTC]. You here would have something to actually sell if staking a postion, which would also afford you to continue sitting on BTC as/ if it corrects.

BTC/ USD

A technical buy of the break of the range as marked would give a speculative target of a 7x return on the basis of the LGC [which has performed remarkably well for price prediction since 2018]. A high likelihood of yet another correction afterward back to the buyzone, so would make sense to take profits in something else that had ‘leveraged’ the volatility on the way up. This would also give you the luxury of continuing to sit on BTC for the even longer-term.

Conclusion

Given the ‘problematic’ of diminishing returns, a solution is sought for. The go-to solution to my mind is a few alt coin investments [for the next year or two]. There is a good chance that they will outperform BTC to the upside in terms of ROI/ returns, and the investor/ trader having staked a few positions, would then have something to sell and take profits in in a manic market. The alternative is to just continue to sit on BTC, where though the returns are relatively good they make take twice as long as expected. And of course, there is always the phenomenon of the ‘digital gold bug syndrome’, where the higher price goes, the more difficult is comes to sell…. a transvaluation of values of sorts. If it is just an alt you’re sitting on, it may be a lot easier to sell that than your core [or part of your core] BTC. For just as it is now, with low prices difficult to buy; it might then, with manic prices, be difficult to sell.

Until next time,

Stay, relatively, safe out there,

Dave the Wave.