What happened to the alts?

Wednesday 14 October 2015

Alts have always been a risky proposition, but the length of the bear market has been surprising all the same.

Bitcoin has had a bad couple of years since December 2013. From a high of $1,200 it’s now worth around $240. But losing 80% of its value is nothing compared to a lot of the altcoins.

Ever since the first alts appeared on the scene, starting with Litecoin, it was clear they were a different beast to bitcoin. Bitcoin went tenfold in a matter of weeks; Litecoin went 30x in value over the same period. The same, sadly, is true on the way down. At one point touching almost $50, it crashed down to just $1.50 before recovering.

Read also: The hidden uncertainty of Ethereum as a currency

Car crash

Bitcoin has had a bad 18 months, but the alts have been a car crash

Bitcoin is a large market, with plenty of liquidity - at least by crypto standards. Most alts have less than a hundredth of bitcoin’s market cap, and the majority less than a thousandth, and they are thinly traded. That means it doesn’t take a lot of money to push them hard in one direction or another. Poor distribution also means they are susceptible to large holders dumping their stashes. Manipulation, taken for granted as an occasional feature on the BTC markets, is rife in the alts.

Then there’s the odd habit that people have of pricing the alts in BTC terms, rather than USD equivalent - probably because alts almost exclusively trade against bitcoin (only a few have their own fiat gateways). If bitcoin rises 5%, an alt pegged to it will do the same. The coin’s own ups and downs are superimposed on that movement in its underlying bitcoin price. Essentially, then, alts are a leveraged play on bitcoin. The rewards can be huge; equally, the losses devastating.

One of the problems is that, if there’s no real way to value a bitcoin, there’s even less to value most alts. What is a bitcoin really worth? There have been many guesses, but nothing convincing. And bitcoin at least has liquidity and network effect, making it a viable currency. When confidence is lost in an alt, the results can be catastrophic. And that’s what’s happened in the last 18 months, as contagion from the BTC sell-off has driven many alts to a fraction of their former value.

It doesn’t help that there are so many clones, as well as outright ‘scamcoins’ like Paycoin and a few other choice examples. This takes liquidity away from legitimate projects, and undermines confidence in alts as a whole.

And that’s a shame, because there are some real jewels in the altcoins.

Not many, granted - the majority are clones offering little but promising the moon. But there are a handful that show real innovation, absolutely cutting-edge tech and real use-cases, with small but talented and motivated communities behind them. The sad thing is that these are often lost in the noise and the hype from the dross, whose only real purpose is to enrich a small group of developers and large holders. The market as a whole is so driven by short-term speculation that value flows from one coin to another in a heartbeat - a problem if you’re trying to set budgets for a genuine undertaking.

In a future article I’ll be looking at how to invest in alts - meaning real, long-term investment, rather than short-term speculation. There’s room for more than one crypto in the world, and bitcoin doesn’t even pretend to do everything that blockchain technology offers. It’s fair to assume that a at least a few alts have a bright future, built on real use cases and adoption, not hype.

Fortunately Paycoin isn’t one of them.

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