Crafting Our Altcoin Strategy

Hello Investors,

This week we explore the dynamics of altcoins and what to consider when designing our altcoin strategy.

We will cover:

1. What are altcoins - blue chips vs. small-caps

2. Why are they important - cycle, performance, sectors, diversification

3. Crafting our strategy - what to consider when investing

Enjoy,

Altcoins 101 — Crypto Beyond Bitcoin

Altcoins, or “alternative coins,” are the cryptos that aren’t Bitcoin. Simple enough, right?

Similarly to stocks, we’ve got the “blue chips” — these are the market leaders, think of them as the Amazons and Apples of crypto. They’ve got substantial market caps, a proven track record, and generally, less volatility.

From an investment perspective, blue chips are our safer bet, often backed by more robust fundamentals and a clearer path to utility and adoption. These projects often survived a crypto winter (bear market), and still exist, which is a good sign they might do it again in the future.

On the other side of the risk curve are the “small-cap” altcoins, the start-ups of the crypto world. High risk, high reward.

These projects can explode, resulting in high double-digit multiples, but they can as easily erase the whole investment.

With limited track records and historical data, evaluating small projects is harder, more of an art than science, and the approach is different.

Why should we care about altcoins?

There are a couple of reasons to consider altcoins:

1. Cycle: As mentioned in the piece on crypto market cycles, altcoins historically outperformed BTC during the bull run.

2. Short-term gains: The lower the market cap, the smaller the investment required for the pump. You can’t get 10x on BTC in the following months because it’s as big as Meta or as Netflix, Coca-Cola, Shell, Cisco, Walt Disney, and Nike combined.

3. Sectors: BTC isn’t everything, if we want to cover gaming or AI, we need to go deeper.

4. Diversification: Altcoins give us much needed diversification and can offset the pullback on other cryptos.

For example, we are experiencing a market correction right now, and while both BTC and ETH drop, Solana is rising.

And when L1 is moving, the ecosystem projects usually follow but with higher impact - this works both ways, if Solana drops, the ecosystem projects drop more.

Help me help you - which format brings you more value and you want in the future?

1. Educational - examples Market Narratives, Market Cycles, this one

2. Market Highlights and My Take/Action - examples BTC crossed $1t, Crypto is ready for the bull run

Crafting Our Altcoin Strategy

Investing in altcoins should never be just spread and pray.

Navigating the landscape requires some due diligence and a solid strategy.

Here’s how to do it:

1. Sector Selection: Crypto, like the stock market, is divided into sectors. DeFi, AI, Gaming — where do you see the future heading? Picking the right sector is half the battle.

2. Consider your budget: Spreading too thin is not worth it. Decide on the amount you want to invest in that sector. That will help you understand how many projects you can cover.

3. Risk profile: Consider the risk:reward ratio you want to achieve. As you go lower in the market cap you exponentially increase both the risk and the reward. Building a healthy foundation of big projects before considering small risky bets worked well in the past.

4. Fundamentals: Dive into what the project actually does. Is it solving a real problem? How strong is the team and community behind it? Do you believe people will use the product? Without users, it’s just a speculation.

5. Market Cap Matters: Understand the difference between circulating market cap and fully diluted value (FDV). The former tells you the current market value, while the latter gives you the big picture. Also, keep an eye on the float — a low float means fewer coins are available, which can lead to high volatility.

You can browse sectors on CoinMarketCap and CoinGecko.

Let’s do an example together.

Example - Gaming

Gaming was one of the biggest narratives in the last bull cycle and is currently lagging behind, so it is an interesting area to explore as it might see growth later in the cycle.

When opening the gaming coins, we can see different sub-categories:

1. Infrastructure - IMX, Gala, Beam, Wemix, Ronin, …

2. Gaming studios - Echelon, Illuvium, Nakamoto, Vulcan Forged, …

3. Metaverse - Sandbox, Decentraland, ApeCoin (Otherside), …

4. Games - Big Time, Heroes of Mavia, Star Atlas, Aurory, Shrapnel, …

The biggest tokens are infrastructure, and this is our safe bet. Immutable and Gala both survived a bear market and both are building huge gaming ecosystems with great games to be released. Beam is former Merit Circle, one of the biggest Web3 gaming guilds and investors. Wemix is an EVM ecosystem built by WeMade, a studio behind Mir4, and they recently launched Night Crows, a game that achieved $10m in sales in the first 3 days (s).

All of these are great options for safe gaming bet. But since they already sit at higher valuations, we will take a look into the lower cap section as well. Sticking to infrastructure, let’s explore Xai.

Xai is a gaming layer on top of Arbitrum, and it recently had a successful launch with a lot of buzz on socials.

Just by checking its market cap, it seems like a low-cap project ($314m) with high potential.

However, Xai has only 11% of tokens in circulation, putting the FDV at $2.8b. That’s 57% more than Gala, a gaming ecosystem with dozens of strong gaming titles already released or planned this year.

What’s more, Xai will face a huge supply boost when tokens start their unlock - 1st is scheduled for the 9th of July 2024 when an extra 200m tokens will flood the markets (currently 277m in circulation).

These unlocks dilute the value - you will eventually have 9x more tokens on the market than today.

That’s why market cap & FDV matters and we should always consider it, together with token unlocks, when doing our due diligence.

There is an angle we can play this. A low circulating supply means less money is needed for the token to pump. We can speculate Xai will gather enough hype for people to ape in. When they do, this will skyrocket and can give 2-3x.

However, this is a speculative scenario that isn’t guaranteed (high risk), you need to exit in time (before the unlock), and I would consider this approach only after building a solid portfolio.

Side note, I’m taking this angle, so will let you know if it worked out or not.

Good luck!

Matt.