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How to be prepared for the coming Altcoin bull market.

Rule 1: Never lose money. Rule 2: Never forget rule 1.
-Warren Buffett

Edit Dec 2019: Looking back on this 2+ years later I have come a long way in my understanding of markets, but I’ll leave this here for posterity. If you want to see what I’m up to now, get my weekly Quant Report newsletter.

So you bought some altcoins this fall, hoping to catch the next wave of 5, 10 even 100x+ returns like the ones we we saw earlier this year. If so, you are not alone. The return of the so called “alt-season” was widely declared on social media:

You were hoping for this:

But what you got was this:

Alts have dropped faster than Kevin Spacey’s fan base — not only relative to Bitcoin, but also in USD.

So What happened?

Before I address what to look for, lets first look at what went wrong over the last couple of months.

You see, I believe we had a perfect storm of 3 interacting forces. Let me tackle each, and then I’ll share 5 clues to watch for, so you will be prepared when altcoins finally make their return.

Problem #1: Too many people expected the return of alts.

One of my favorite quotes is by Bernard Baruch —

The main purpose of the stock market is to make fools of as many men as possible.

-Bernard Baruch

If there is one thing I’ve learned, it’s that once everyone “knows” something is going to happen in the markets, it never happens. The market gods don’t allow it.

For example — Have you ever seen a company issue a good earnings report, only to have the stock price immediately dump?

This tendency of the markets to factor in the price of future events well ahead of the actual events is called “discounting”. It’s why we have the old adage “Buy the rumor sell the news”.

As the crypto markets mature, information gets priced in more efficiently. Not long ago you could count on a coin to pump on the latest developer update or exchange listing, but those days are rapidly coming to a close.

Just remember this: The more people you hear predicting something, the less likely it is to actually happen. We can’t all win in a zero sum game.

Problem #2: The Market cycle rules all.

If you are not familiar with the classic emotional market cycle graph, drop what you are doing a learn it now. The market cycle graph was first introduced to the crypto markets by psudonymous trader Kazonomics, follow his twitter account for next level understanding of markets in general.

Take a look at Gold, the Dow, Bitcoin 2013, the US dollar, the human heartbeat, and so on:

You see it everywhere.

The markets cycle could be described as an impulse wave followed by a decay. The reasons behind this are fascinating , and books could be written on the subject.

But for now, what you need to know is :

1: A new impulse usually doesn’t happen until the “decay cycle” has completed and volatility has declined. (more on this below).

2: This fall, the altcoins were in the decay cycle.

During the decay cycle, little fake rallies get investor hope up, but fail to deliver, time and time again — does this look familiar?

This time is different, I swear.

Problem 3: Poor Liquidity Added fuel to the fire.

Most altcoins have very low liquidity compared to Bitcoin.

What is liquidity?

An asset is said to be liquid if you can easily buy and sell it without affecting the price. For example, think of buying a share of Walmart stock. Buying and selling is easy because there are millions of shares available, and your purchase of one or two shares will have almost no affect on the price.

Now imagine you are selling your house, and you are one of 3 sellers in the neighborhood. Your jerk of a neighbor puts his house up for far less than yours. Suddenly, you have to lower the price of your house just because of ONE seller. That’s an illiquid market.

One way to measure the liquidity of an asset is by the number of buyers and sellers. One way to measure this is by looking at exchange volume. Here is a graph of the average volume of the top 600 altcoins compared to Bitcoin:

Those Low Volume Gems !

We can see that Bitcoin alone controls about 40% of the volume, and the top 10 altcoins control about 90%.

Why is this important?

It means that, as an investor, if I take my $1000 dollars out of an altcoin, and put it into Bitcoin, the price of that alt will fall more than the price of Bitcoin goes up. Multiply that across millions of investors, and you can see how small swing in Bitcoin’s price can cause havoc for alts.( edit Jan 2020— this whole section is overly simplistic, even though it make intuitive sense.)

Now, low liquidity is not necessarily bad — the massive 10 and 100x gains we have seen in altcoins in the past are partly due to their low liquidity — what goes up fast can go down fast and vice versa.

So when are Altcoins back?

In my hunt for promising altcoins to invest in, I am looking for 5 clues:

1: One altcoin to lead the charge and remind us of what is possible. (Has this just happened with Bitcoin Cash? Dang it, why did it have to be Bitcoin Cash?)

2: Long term down trends to stabilize and alts begin to trade in a tight trading range. (The classic Bollinger Band Squeeze.)

3: Longer timeframe moving average crossovers.

4: Altcoins to begin establishing higher lows on the daily timeframe.

5: Twitter to quit saying #ALTSAREBACKBABYYEA!!!

Good luck, and may the trend always be in your favor.

If you got any value from this, please give me a clap or two so others will see it too!

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