Common crypto misconceptions: Cheap coins are not always cheap!

Especially in the last few weeks, it is notable that investors seem to prefere buying “cheap” coins, meaning the ones that are sub $5. To visualize the magnitude of this behavior, let’s take a look at the top 9 coins by market cap. It is remarkable that the five sub $5 coins (Ripple, Cardano, NEM, TRON and Stellar) outperformed the other four coins by a wide margin over the last seven days:

XRP +37.38%
ADA +110.63%
XEM +60.39%
TRX +505,56%%
XLM +135,71%

And those numbers even contain the rather steep declines since yesterday. In my opinion, the rapid rise of these coins is caused by new investors that do not care about fundamentals or the market cap of a coin and simply see them as getting-rich-quick-schemes.

But a $1 coin could yield 15,000x profit when it rises to Bitcoin levels right?

WRONG!

This thinking is exactly what is the main problem here. It’s all about coin supply and market cap rather than the actual price of a coin. Let me give an example.

If TRON went on to be worth $15,000 per coin, that would result in a market cap of about $986 Trillion. Yes, Trillion, with a “T”! In comparison, the total M2 money supply of US dollars is around $15 Trillion. Therefore, these kind of price increases are not only highly unrealistic but from a rational perspective they are straight up impossible. That’s why a rational investor should always look at the market cap rather than the price. The price really doesn’t matter. If for some reason bitcoin would do a split and multiplied the supply by 100 while reducing the price by the same factor (therefore holding the market cap steady), this wouldn’t change anything about the project. So why should the price matter in any way?

The fact that many new investors (maybe due to the fact that they are investing for the first time and have no prior knowledge about markets) don’t seem to understand the price/supply/market cap relation leads to a highly irrational market. In my opinion this irrationality can and will lead to something bad. When then bubble starts popping, those are the coins that will suffer the most, because their price is not fundamentally driven, but solely by price speculation. And at the same time that will affect the whole market!

How can we avoid such behavior?

This is a tough one, as we already came that far, new money is flowing in every day. The only way is to educate new investors about this bias, especially before “cheap” coins like Ripple, Cardano or NEM hit Coinbase! This is important to limit the "dumb money” from doing dumb decisions.

On the other hand, if you’re a trader, you can totally exploit this behavior in order to predict the next profitable coin, as right now the sub $1 coins have a very high chance to yield big returns. If one of them hits coinbase and therefore get exposure to new investors, there is a decent chance they will shoot up in price. But those returns are not sustainable in any way, so be careful. (None of this should be considered as financial advice)

Lesson: The actual price of a coin does not matter in the long run and shouldn't affect your investment decisions.

@memekings