TIME TO BUY ALTCOINS?
Bitcoin Dominance Rising
When investing in cryptocurrency, there is one question every investor should always be asking: “Is it better to be in Bitcoin right now or in this particular Altcoin?” I certainly agree with the merits of diversification but there are times when one’s portfolio should be overweight Bitcoin and other times when the Alts are the better place to be. Knowing when to make the switch is the tricky part.
July saw Bitcoin prices rise by over 30% after finding a low near $5800 at the end of June. A major catalyst for this rally was renewed excitement around a potential Bitcoin ETF being approved this year. As a result, many of the alts lost ground relative to Bitcoin even though July was such a strong month for crypto compared to the corrections we saw in May & June.
While the BTC dominance has increased to over 48%, the total cryptocurrency market cap value has remained relatively flat over the past few weeks due to the shift of capital from the Alts back into Bitcoin. We have seen these cycles before and the chart above shows two recent times when Bitcoin’s dominance increased significantly.
During September to October of 2017, we saw a 40% increase in the BTC dominance. January to March of 2018 also saw a 36% rise relative to the alts. This recent run has seen the dominance grow by 33% since May. The question is how much further will it increase before the Alts stage a comeback rally?
Altcoins or BTC?
The portion of my capital allocated to my “long-term HODL” has been predominantly in Bitcoin for the past few months. I started June with a split of 60% BTC/40% alts and it has risen to over 80% BTC now. I’m personally taking a hard look at the Alts here and I believe it’s time to start re-allocating some Bitcoin back into the Alts.
Below are the daily charts for several big-cap names to highlight the declines since May relative to Bitcoin and the oversold conditions that are currently present. While they could certainly continue lower, I will be looking for signs of reversals and climactic selling to signal that the lows are in.
Crypto Portfolio Set-up
There are countless approaches to setting up a cryptocurrency portfolio. You could set up a big-cap only portfolio, or a mix that includes mid-caps or even build an aggressive portfolio comprised primarily of speculative small-cap names and ICO’s. There is no “right way” that works for everyone and much will depend on the risk tolerance, time horizon and specific goals of each individual investor. Below are some guidelines that I use and the five major steps I take when deciding what to include in my portfolio.
This is a top-down approach with specific project selection as the last steps. Additionally, I employ an active approach rather than a passive investment approach and rebalance often. I understand there may be tax implications in certain jurisdictions when trading crypto but that is beyond the scope of this newsletter and is certainly something each individual should consider. My personal belief is that I would rather pay taxes on my net profits than see my portfolio drop by 60%. Additionally, there is also the danger of over-trading so like most things in life, balance is the key.
STEP ONE: Cash versus Crypto
In this step, I decide how much of the investment capital that I’ve allocated for cryptocurrency to put into the market. Ideally, this should be 100% in crypto but following periods of extreme market euphoria, there is often a deep correction so I will take some profits and “raise cash” with the intention of buying back in at lower prices. I look for panic lows such as those seen in February, March & June as opportunities to “buy back in”. It’s important to note that I never exit crypto 100% and will always have some portion invested.
STEP TWO: Bitcoin versus Altcoins
In this step, I decide how much of my portfolio should be in Bitcoin and how much should be in Altcoins. As long as Bitcoin remains the dominant cryptocurrency, it will be the single largest holding in my portfolio with a minimum of 20% allocation. It’s important to note that this is only for the portion invested and does not apply to any cash reserves.
STEP THREE: Sectors & Categories
In this step, I decide which categories of crypto assets to be in and how much to allocate to each one. This is the most time-consuming step and requires some research. This is also very personal and will depend on your own goals and risk tolerance. This can include sectors such as currencies, privacy coins, platform protocols, exchanges, etc.
The example above shows the two largest categories as currencies & platforms. My personal approach is to make the platforms category the largest allocation after Bitcoin. Some examples of platform protocol names would be Ethereum, Cardano, NEO, and EOS. There are also many small-cap names that could be included in this group.
STEP FOUR: Pick Specific Names
Once I determine which category and more importantly, how much to allocate per category, I look for specific projects to include. There isn’t a hard rule as to how many individual names one should pick but there is such a thing as having too many names or being “over-diversified”.
As a guideline, the number of individual projects you decide to invest in should be relative to the size (dollar value) of your portfolio. If you are just getting started and only have a small amount to invest, I would recommend that you select only a handful of names for your portfolio (10 or less). As it grows, you can begin to add more names and diversify further.
Keep in mind that crypto-assets have a high degree of correlation so diversification only goes so far. They tend to move up and down together.
STEP FIVE: Timing
Once I know which names I like and the target portfolio I want to build, I look for opportunities to pick up those projects at better prices or during cycle bottoms. This is the hardest part but I employ many of the same technical analysis strategies that I use for my crypto-trading. The difference is simply the timeframes that I analyze. For my trading, I often look at 1hr or 4hr charts but for the long-term account, going with a daily chart is best.
So, is it time to buy the Altcoins? In summary, yes. I think we’re getting close and I will be looking to increase my Altcoin allocation in August. Keep in mind that that is the potential for a Bitcoin ETF being approved in the coming months so I will continue to keep a healthy portion of my holdings in Bitcoin. However, I’m looking at the alts as a way to potentially increase the satoshi value of my portfolio. My goal is to realize any BTC gains by moving back into Bitcoin when it looks like it’s time to exit the alts again.
Below is the target allocation I will be looking to establish:
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