Consider Altcoins

It’s pretty amazing how quickly the Bitcoin tides have changed. Just two weeks ago, with prices close to $20,000, Bitcoin seemed unstoppable, but prices have now fallen 35% and cannot get up. “$30 transaction fees?” “You fool, you don’t buy a cup of coffee with Bitcoin. It’s gold. You are supposed to hold it.” I think the ‘hold’ argument is valid, but people are tired of the fees and slow transaction speeds, and this makes altcoins increasingly appealing and explains why Bitcoin’s market cap dominance has fallen from 60% a month ago to now just 36%.

I don’t think ‘HODL’ is the best strategy going forward for Bitcoin holders. There are two risks for holders:

1. The entire crypto market falters

2. The particular currency you are holding falters

The first risk can be mitigated to some degree by selling and raising cash so that you can buy the next big dip, obviously at the cost of upside.

The second can be mitigated through diversification.

DAG (directed acyclic graph) is an alternative to blockchain-based currencies and offers zero fees and near instant confirmation. Thus I have since added some Rai Blocks (XRB) (up 100% on the position thus far) and some Iota. If XRB is superior to Bitcoin, and the evidence suggests it is, then there is the small but real possibility Bitcoin and related blockchain currencies will become obsolete. I did some research to investigate how the ‘Bitcoin community’ is handing such a possibility, and the general consensus is that blockchain and DAG can coexist and that Lightning Network (LN) can solve the scalability problem.

Lightning network, despite the hype, does not solve the scalabiltiy problem much, because it does not eliminate the dependency on the blockchain and both the sender and the receiver must be on the network. Lightning Network is NOT an upgrade of the Bitcoin protocol, but rather people have to implement it themselves. Plus, the adoption, as expected, is taking a really long time.

Here is how I might construct a diverisfied crypto-currency portfolio:

20% Bitcoin
10% Ripple
10% RAI blocks
10% Iota
10% Monero
10% Dash
10% Litecoin
10% Bitcoin Cash
10% Etherium

Each of these currencies offers a unique advantage. Although Bitcoin’s technology is stale, it is the most ubiquitous by far. Dash & Ripple are trying to emulate payment processing for small & medium-sized businesses. Litecoin and Bitcoin Cash are like Bitcoin but faster and cheaper. Monero offers privacy. 20% of this portfolio is in DAG-based currencies.

As for obsolescence, although old and new technologies can and do coexist, the new and better technology takes over:

Facebook > Myspace
Google > Yahoo
Gmail > Hotmail
Word processor > typewriter
Ballpoint pens > quill pens
Car > horse and buggy

Given that Bitcoin and altcoins are highly correlated in price, but that altcoins are superior in terms of transaction speed and fees, there is no reason to hold Bitcoin over an altcoin. In terms of correlations and fungibility, $10k in Bitcoin is pretty much the same as $10k divided between the top-ten alts, with the added bonus of diversification. As for adoption, many merchants use services that allow the customer to choose among many currencies: Dash, Litecoin, Bitcoin, Etherium, and Etherium Classic.