Cryptocurrencies traded sideways since our last report on cryptos. However, I noticed something interesting when playing around with Yahoo! Finance’s cryptocurrency screener: There are profitable pockets in this market.
Incidentally, Yahoo’s screener is far superior to the one on CoinMarketCap, so if you’re looking to compare digital assets, I highly recommend it.
But let’s get back to my epiphany.
In the last month, at one point or another, most crypto assets on our favorites list saw double-digit increases. It’s true that each upswing was followed by a hard crash, but investors who rode the trend would have made a nice chunk of change.
This isn’t a trading strategy I usually recommend. In fact, I don’t usually approve of trading cryptocurrencies at all. My modus operandi leans more toward long-term value investing because I like cryptos with practical use cases. But this is a tough market.
Volatility is still high and unlikely to abate in the next few weeks. As such, investors might want to consider following trends, if only in the short term. Also, keep an eye on trading volumes, as they foreshadow big price movements.
Now for the cryptocurrency news stories that have caught my eye this week.
New Study Shows That Diversifying Cryptos Helps Minimize Risk
“Diversify your portfolio” is an age-old investing truism. It comes in all sorts of variations too, including the classic “don’t put your eggs in one basket.”
We know it applies to stocks, bonds, and precious metals. However, we didn’t have any research proving that it also made sense when investing in cryptocurrencies.
Common sense told me it did, though, which is why I reminded investors to choose a variety of assets, not just one or two. Now I have found that a research team at Bocconi University has proven me right.
When researchers looked into Modern Portfolio Theory (MPT) and its effects on cryptocurrencies, the numbers showed that holding a wider selection does help protect you from catastrophe. (Source: “A Markowitz Walk Down Crypto-land: Modern Assets for Modern Portfolios,” Bocconi Students Investment Club, May 7, 2017.)
“Indeed our findings, consistently with MPT, are that portfolio variance can be significantly lowered by exploiting low covariances between coins,” wrote the researchers.
Two additional points:
- Diversification limits the upside of cryptocurrency investments, although not necessarily as much as it reduces downside risk.
- Diversification doesn’t make crypto investing foolproof.
There is still a lot of risk to managing these assets, so any investors unwilling to lose money should walk the other way. High rewards demand high risks.
Much-Awaited Crypto Platform Goes Live
Online gambling is perhaps the most natural setting for a cryptocurrency. Gambling on the Internet involves millions of people who come together in a perfect market, eager to bet on the outcome of…well, pretty much anything, really.
The only hiccup is the “bookie.”
Bookies sit in between the bet. They set the odds for the wager, then take a slice of the trade for themselves. What’s amazing is how much power they have; bookies control the entire flow of information on a bet.
Two years ago, a blockchain company called Augur set out to change this dynamic. Its pitch was simple: blockchains are cheaper and fairer than bookies! Instead of relying on a self-interested third party to moderate the bet, why not use software to lock in either side of the arrangement?
That way, no one can “fix” the odds.
I remember thinking that this was a brilliant solution to a real-world problem. Gambling is as old as civilization, and its flaws are just as old. Now that blockchain could solve one of its biggest problems, investors might want to consider investing in Auger’s native token, REP.
I personally think the upside is huge.
Prediction markets run the gauntlet from football games to presidential elections. People simply love to gamble. And considering that the U.S. Supreme Court recently legalized online sports gambling, it seems like the perfect time to introduce a common currency for those gamblers. (Source: “States Can Legalize Sports Gambling, U.S. Supreme Court Rules,” Bloomberg, May 14, 2018.)
Augur is doing just that.
New Report Says 12% of Ethereum Held by Top 115 ICOs
One of the reasons I like Ethereum (ETH) is its first-mover advantage. Not first in terms of cryptocurrencies—that was obviously Bitcoin—but first with regards to the finer points of blockchain, such as smart contracts and initial coin offerings (ICOs).
Every time I issued a bullish ETH price forecast, it was because I believed that this protocol layer had become foundational to the blockchain industry.
A new report suggests that I was, you guessed it, correct in that assumption.
The report looked at platform networks like Ethereum, NEO, and others. It showed that Ethereum “has a high degree of first mover advantage (nearly a three-year head start, plus the entire market share of the ICO discovery phase through 2017) in addition to high levels of community support, liquidity, and developer buy in.” (Source: “Cryptoasset Market Coverage Initiation: Network Creation,” Bloomberg Research, July 11, 2018.)
Another fact was that around 12% of all ETH tokens are owned by the top 115 ICOs, meaning that Ethereum is genuinely a reserve currency for the blockchain startup community.
Other insights from the report were less upbeat. One in particular pointed out that 78% of ICOs were scams, around four percent failed, and around three percent had gone dead.
The dark days aren’t behind us quite yet, when it comes to cryptocurrencies. Investors can ride out the storm by trend-following the big cryptos in the short term while holding out on smaller cryptocurrencies in the long term.
Eventually, I believe that tokens like Augur’s REP—ones with big, active markets—are going to drive the mother of all recoveries. All we have to do is wait.