Altcoin Investing 101: How to Build Long-Term Wealth

If you’re new to investing in New Finance, you probably have a few questions:

At Bitcoin Market Journal, we’re here to help you build long-term wealth by making great investing decisions in this new world. You’ve come to the right page.

 

What are Altcoins?

Plain EnglishThe easiest way to think about investing in altcoin like Ethereum or Ripple is like investing in a stock. It’s a piece of an enterprise that you can buy or sell at any time using online exchanges like Poloniex. If the value goes up, you make money; if the value goes down, you lose money.

We call them “altcoins” because it sounds like “bitcoin,” which is the innovation that started it all. (Read our Bitcoin 101 if you haven’t already.) These new blockchain-based assets are alternatives to bitcoin: altcoins.

Some people call them “cryptocurrencies,” because they are built on cryptography. This is a terrible name. (Too many syllables.) Some people shorten it to “cryptos,” which is even worse, because it makes you think of dead things. So, “altcoins” it is.

To understand why altcoins are such a huge innovation, let’s look at one of the riskiest investments you can make in life: buying a house.

“Enjoy your risky, uncertain, highly illiquid investment!”

You can’t buy a portion of a house: you have to buy the whole thing. There’s only one buyer and one seller, so neither party knows if they got the best deal. Did you overpay for the house, or did you underpay? You don’t know what your local real estate market will be in the future, so it’s an uncertain investment. And your house is highly illiquid, so if you do need to sell, it’s a difficult and time-consuming process.

Yet, most of us invest in a home without thinking. (Where else do you keep your stuff?)

The great innovation of the stock market was that it allowed investors to buy a piece of an enterprise, not the whole thing. No longer did you have to buy an entire company, you could just buy a share. The shares were liquid, so you could sell them easily. By spreading out risk, more investors jumped in, and the economy boomed.

This is why the altcoin market is also booming. By allowing anyone to easily buy a piece of these new blockchain enterprises, more people are jumping in. This gives entrepreneurs an incentive to innovate, start new companies, and launch new altcoins.

Investing in altcoins is very much like investing in the early days of the Internet, when investors were wild about dot-coms. That early bubble popped in 2000, and it is likely we will see the same here. But that bubble also provided the funding for the Amazons and Googles of the world. Our mission is to help you uncover the great companies beneath the hype: to “dig for gold.”

 

What Are You Really Buying?

We’ve described altcoins as buying a piece of an enterprise, like a stock. But they’re not a stock, because many of these altcoins are not companies: they’re distributed and decentralized. Mark Zuckerberg could never try to buy out bitcoin, for example: it would be like trying to buy the internet.

The easiest way to think of investing in altcoins is that you are buying confidence in an enterprise.

This may seem strange, but isn’t it what our entire economy is based upon? We even have a name for it: “investor confidence.” (State Street has even developed a way to measure it.)

Unfortunately, it reports on the past, not the future.

This is, in fact, how we make all our investment decisions. You buy a house because you are reasonably confident it will be worth more in the future. Parents make huge investments in college tuition because they’re confident it will add to their children’s market value.

How else do you explain the sky-high valuations of companies like Apple or Tesla, which break all the laws of traditional stock valuation? It makes no sense, unless you say, “Ah, it is Apple’s moat and Elon Musk’s vision that makes investors so supremely confident.”

Most discussions of altcoins get bogged down in the technical details on how the altcoin is used. These factors are important, but most important is realizing that altcoins are a “token of confidence.” This is why we sometimes call them tokens.

 

How Do I Find Good Altcoin Investments?

If altcoins are a “store of confidence,” the key question is, how do you value confidence?

In 1949, Benjamin Graham published The Intelligent Investor, still considered an investing classic. Graham’s approach, later called “value investing,” was to find valuable companies, buy them at reasonable prices, then hold them for the long term. Graham’s work was studied by generations of successful investors, most famously Warren Buffett, whose approach we are bringing into the 21st century.

One of Graham’s well-known parables was about a manic-depressive investor named “Mister Market.” Imagine you buy an altcoin like Ethereum. One day, Mister Market knocks on your door, clearly in a manic phase. He’s talking a mile a minute about the future of Ethereum, the great things that will be built on top of it, the Ethereum Enterprise Alliance. “It’s better than bitcoin!” he exclaims, sweaty and breathless. “I’ll pay you anything to buy it!”

The next day, Mister Market softly knocks on your door. He comes in and flops on your sofa. “Ethereum sucks,” he says. “This whole thing is a bubble. What the hell did I buy, anyway? Look at the name: ether! Why would anybody buy a gas that makes you unconscious?” He starts to weep. “I wish I had some real ether,” he sobs. “Please buy this back. You name the price.”

If Mister Market represents the stock market, then the altcoin market is like Mister Market off his meds. On any day, there can be wild swings that would be unthinkable in traditional investing: an altcoin’s price can literally increase 10x in a week – then fall again by that much.

To build long-term wealth, we must avoid getting caught up in Mister Market’s wild mood swings. Here’s how.

 

How to Build Long-Term Wealth

1) Do your homework. Successful investing takes work (there’s no free lunch). This means you must thoroughly analyze an altcoin before you buy it. Most altcoins are not going to deliver superior returns over the long term, just as most stocks are not going to deliver superior returns. Your default answer should be “Pass.”

But when you find an altcoin that interests you, go deep. Study how it’s being used. Talk to people who use it. Talk with the development team. Look at its adoption rate, its potential market size, its price history. These things will give you confidence in your winners and losers — and confidence, as we’ve seen, drives price.

Don’t invest in what you can’t explain. Don’t invest until you understand the altcoin well enough to describe it to your grandmother. This doesn’t mean you need to understand the technical specifics (you don’t need to understand aerospace engineering to invest in Boeing), but you do need to understand at a high level how it works.

2) Reddit is your enemy. Reddit is an incredible site for funny GIFs of people falling down stairs, but it’s not the best place to get investing advice. The same goes for other online investment forums: there’s no entrance exam, so anyone can say any fool thing that comes into their head. It’s like peering into the mind of Mister Market.


Reddit: great for funny GIFs, not so great for investing advice.

A successful investor must bet against the market: by definition, she must be right when others are wrong. Reading “online buzz” about new altcoins and ICOs is like getting an aerial view of where all the sheep are running, so you can join them. Remember: “Reddit” rhymes with “idiot.”

3) Protect yourself against serious losses. Do not invest more than you are willing to lose. Be willing to lose 100% if necessary, and consider it tuition paid.

To protect yourself against risk, it’s best to think of altcoins as a percentage of your overall investing portfolio. Keep the majority in traditional investments like stocks and bonds, and allocate a portion (up to 20%) in New Finance opportunities: bitcoin and altcoins.

You’ll hear stories of people making all-in YOLO bets, and coming out huge winners. Ignore these stories. You won’t hear about the people who went all in, and lost. People rarely relive those stories, except to their therapists.

4) Get rich slowly. Let the crazy people try to time the market, trading in and out, buying into speculative ICOs. You’ll hear about the huge gains they achieved in just a few days. Visualize a force field that protects you from their insanity.

Guard yourself against the thinking that “I need to make 10x my money in a month.” This is gambling. The only people who get rich from gambling are casino owners and the government.

Instead, adopt the view that, “I’m investing in this altcoin because I really believe in it. I’m willing to ride out the inevitable ups and downs.” Think more about marriage than a one-night stand.

5) Believe in your abilities and judgment. Without belief in yourself, you will be subject to the whims of Mister Market. You’ll start to believe his predictions of unlimited sunshine, or his fears of permanent gloom.

While you shouldn’t listen to online chatter, since it represents the hivemind, you should listen to the opinion of believable people with a track record of success. As Ray Dalio advises, “believable people” are:

  • investors who have achieved multiple successes,
  • and have a good explanation for how they did it. (They weren’t just lucky.)

Even then, however, you should take their opinion with a grain of salt, because very often the experts do not agree. Instead, look for people to challenge your ideas, to polish them up like sandpaper on wood. You don’t have to agree with the experts, but you should invite them to poke holes in your thinking. The goal is to find the truth together.

Staying away from amateur opinion builds your confidence.
Being challenged by believable experts protects you from overconfidence.
The sweet spot is in the middle.

6) Understand the market is never predictable. Oh, how we long to have an algorithm that will predict the future! We want so desperately to believe that AI, or technical analysis, or elven magic, will finally tell us about the best investments before they happen.

You cannot predict how the market will behave. If this is true for the traditional stock market, this is many times more true for the altcoin market. It’s like strapping a rocket on a roller coaster.

There is one thing you can control: yourself.

You cannot control what people will say on Reddit, but you can control your response to it. You cannot control what the news media will say about the future of bitcoin, or altcoins, or your particular investment, but you can control what you do about it.

This makes long-term investing an internal game as much as an external one. You have to master your own emotions, being careful about Mister Market’s inner demons, FOMO and FUD.

In the words of the great philosopher Taylor Swift, “Haters gonna hate. Players gonna play. Shake it off.”

 

In short:

  • Do your homework.
  • Find great opportunities at reasonable prices.
  • When you believe in it, go for it. Be bold and hold.

 

Next Steps

If you’ve read through the above, congratulations! You have an attention span. This already sets you apart from most investors in this space. Now, dig deeper:

Comments are closed.