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WAX ON: Why Holding Coinmarketcap's Top 10 Tokens is NOT a good strategy

May 26, 2020
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Video Transcript:

The trading fallacy of holding the top 10 cryptocurrencies.

There is a very common crypto trading strategy that doesn’t make sense to me. Because I think it’s flawed. The strategy that I'm referring is to is buying bitcoin and then “diversifying” your holdings by also acquiring the other CoinMarketCap top 20 or top 10 tokens. There are 2 issues I see with this strategy.

First, the price movements of many of the top 20 tokens have a positive AND SIGNIFICANT correlation with the price movement of bitcoin. And those correlations get stronger as you move into the top 10 tokens.

Look at this chart I just put up. It shows the correlations in price movement between Bitcoin and a number of other popular tokens over the last 30 days. Most of the top 20 tokens are in there. The numbers in this chart go from 1 to -1. So it’s a standard regression chart. The closer each of those numbers is to 1, the more correlated the price of that token is to the price of bitcoin. It’s also greener. The more green the square, the more correlated that token is to the price of bitcoin. You see a lot of green there don’t you? Litecoin, BCH, Stellar, NEO, Binance coin, they all have a significant, and positive correlation with the price of bitcoin, over the past 30 days.

But I’ve run this regression for 1 year time periods, and for the past 7 day time periods, and you find not an exact but a similar pattern. Lots of the top 20 tokens track to the price of bitcoin. This is why there’s a problem with the trading strategy of buying bitcoin and a basket of the top 20, or top 10 tokens. Basically, it’s a redundant strategy. You might as well just buy bitcoin, and bitcoin by the way is more liquid.

This issue with holding a basket of assets that move in the same direction around the same events is a well understood issue in the stock market. People spend a lot of time making sure that their assets are not so strongly linked that a problem in one, affects the other. But cryptocurrency trading is still a nascent industry, and a lot of people are ignoring this correlation problem. But I don’t think you should.

So if you shouldn’t just buy bitcoin and a basket of the top 20 tokens, what should you do? Well a better approach, I think, is to develop an opinion around a particular blockchain sector. So take a position in the blockchain sectors you believe are promising. Now those new sectors could be inter-blockchain communications. Or blockchain video gaming. Or the rise of exchange-issued tokens.

By the way, this is what venture capitalists do. We see some emerging trend, maybe vertical marketplaces, or mobile gaming, or A.I. and we find companies that are doing innovative things in those new sectors. We don’t just say “hey, let’s put our money into the top 10 most valuable unicorns.”

Well, actually now that I think about it, one VC firm did try that strategy. Softbank. It hasn’t worked out well for them.

If you had noticed the emergence of say, exchange-issued tokens a while back, and maybe you even noticed how those exchange-issued tokens have adopted a new economic model that’s different from the classic utility token economic model (those of you familiar with Binance token will understand this), you would have done very well.

Identifying the up and coming PROMISING new sectors in blockchain will also help you identify the best opportunities when those opportunities are still attractively priced. Because other people have not yet done their homework. This is what VCs call having “insight.” Seeing something new, figuring out EARLY why that is going to be a big deal, and then investing in it. THAT, is a far better strategy than blinding buying a basket of the top tokens.

I want to finish here by saying what I’ve discussed in this video is not intended to be personal investment advice. What you choose to buy or sell, is up to you, based on what YOU know about your personal financial situation. What I’m trying to do here is provide a different perspective on these popular, run-of-the-mill trading strategies and share a potentially better way to go about creating a crypto portfolio.

Disclaimer: The information contained herein is for informational purposes only. Nothing herein shall be construed to be financial legal or tax advice. The content of this video is solely the opinions of the speaker who is not a licensed financial advisor or registered investment advisor. Trading Forex, cryptocurrencies and CFDs poses considerable risk of loss. The speaker does not guarantee any particular outcome.


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