As part of my 2018 resolution, there will be fewer posts about topical subjects, such as news, which tends to be repetitive and the outcome predictable or immatertial, and more about stuff that I find more interesting.
It’s unlikely anyone buying Bitcoin today is going to get rich. Yes, some say Bitcoin will be worth $100k or more and may become as ubiquitous as the US dollar, but the goal here is to make money, not wait for a scenario that will likely never happen. Hence, the only alternative is to speculate in alt coins. In 2017, I dabbled in alt coins, buying some Dash, Etherium (which since mid-2017 has sucked), and Litecoin, but did not put enough effort into turning it into a trading operation that could be replicated consistently.
But, first, here are the problems with alt coins:
-there are tons of them, and the vast majority of coins are crap and will amount to nothing
-buying alt coins can be hard because not all coins are on all exchanges
-registering and transferring largish sums of money ($5k<) is risky and may require verification and other annoying paperwork depending on the exchange
-poor liquidity, bad fills, wide bid-ask spreads
-pump and dump schemes
Such risks can be mitigated in a few ways:
-speculating in coins that are worth a minimum of $50 million. This means they are somewhat established.
-a good 'rule of thumb' is to set a multiple of '10' as an exit price target. A $1 billion coin can conceivably be worth $10 billion; $100 million can become $1 billion market cap, etc.
-the breakout is key. A coin that gains 10x must start with a 2x gain, so that is when you want to be buying. The breakout should be 'high' relative to the percentage-change of Bitcoin (which is considered the benchmark), so if Bitcoin is up 10%, the alt coin has to be up way more than that.
-exit after the 10x target is attained (or at least when you have made enough money).
-shapeshift.io has fast processing and has no paperwork. Transfers can be done in 30 minutes, but the selection of coins is limited.
-hang in there. Established alt coins almost never disappear, unlike stocks which often crash and never recover. There are many coins from 2014 still going strong, like Dogecoin and Ripple. The bigger the coin, the more likely it is to stick around. It's not uncommon for an alt coin to rise 100-500%, fall 50%, stay flat for weeks or even a couple months, only to surge an additional 500% without any warning. If you bail, you will miss out.
-the coin should have some of of USP (unique selling point) on the website, that makes it stand out among other coins; for example, low or non-existent fees, anonymity, ease of scaling, etc.
-only allocate 1/3 or less of initial capital to a coin and keep the rest in cash--or--split the cash among three alt coins. That way if you are initially wrong, you can try multiple times. A 10x gain for a single winner means you can withstand some failures, but not if your first few attempts fail. This path dependency has a mathematical explanation. When an absorbing barrier is set a $0 (broke), the normal distribution of expected returns fails.
-don't hesitate. When the opportunity comes, seize it. If the trade begins to sour, then you can do more thinking. But thinking as prices are rising means gains forfeited.
-if possible, take coins off the exchange after a purchase is made. However, after a sale is rendered, you will have cash on the exchange and this carries risk that is harder to mitigate. One solution is to put unused funds in Bitcoin off the exchange, which is considered to be the most stable of all currencies.
-make sure the intra-day chart is contiguous and granular, indicating a lot of trades and a narrow bid-ask spread and high liquidity. A choppy chart that looks like a bunch of zig-zags means that the market has too few participants. That is why you should aim for coins at least $50 million or more.
-prepare to do tedious, boring research everyday in order to find viable breakouts. Go to https://coinmarketcap.com/currencies/ (sort by marketcap) and look for break-outs or gently-rising slopes in the 7-day price graph. Because you are limiting your search to coins worth a minimum of $50 million, all but 100 or so coins can be excluded, making the process easier. By this criteria, as shown in the screenshot, Spectrecoin and NeosCoin (both circled in red) have what appear to be promising breakouts. Repeat this process at least four or so times a day to make sure you don’t miss out.
One strategy that in particular seems to work well is mean reversion. Over the long run, top-tier coins (the largest 15 or so coins in terms of market cap, such as Ripple, Bitcoin, Dash, and Litecoin) are highly correlated, but if one of them is lagging Bitcoin (considered the ‘index’) by a substantial amount, it will catch up, often explosively and unexpectedly. So one can apply the strategy above to find lagging top-tier coins that have begun to breakout. One notable and recent example is Litecoin. From mid-2017 to November, Bitcoin rose from $2,000 to $7,000, but Litecoin stayed around $50-70. Then, in early December, Litecoin inexplicably surged from $70 to $375 in the span of just two week (>400%), far surpassing Bitcoin’s 150% rally in that same period. Given that Bitcoin does not offer any particular advantage over the other top-tier coins, and in fact may be worse due to high transaction fees and slow confirmations, I expect the market caps of all the top-tier coins to eventually equalize. This means Dash and Litecoin are ‘undervalued’ at $6-10 billion.