Adding Altcoins to the Portfolio Doesn’t Make Sense: Bitcoin Developer
- Bitcoin is the only sensible investment
- Bitcoin forks like LTC, BCH, BSV’s “quality is worse” and “there’s no risk reduction”
- Over-promising and under-delivering results in a “giant mess of an industry
“Diversification in cryptocurrencies makes little sense,” is what Jimmy Song, a Bitcoin developer, educator, and entrepreneur explains in his latest post on Medium titled, “Why Cryptocurrency Diversification Makes Little Sense.”
Song being the Bitcoin Maximalist says the one cryptocurrency that is sensible to invest in is Bitcoin because he says the world’s top cryptocurrency is qualified through its “unique birth” and maintenance that has been continuing throughout its 10 years.
The difference bewteen bitcoin and altcoins is being decentralized, not having any perverse incentives to its creation, and largest market cap.
“Diversification of a portfolio by adding Bitcoin really can add upside, reduce risk and reduce volatility (if it’s counter-cyclical). Adding unresearched altcoins does not and hence makes no sense.”
Incentive to over-promise on the story and under-deliver on the reality
Per Coinmarketcap, there are 2189 cryptocurrencies out there so how does an investor figure out which one to invest in, questions Song.
Presenting his argument for the same, he says the purpose of diversification is to reduce volatility and mitigate the risk of permanent loss. This is why diversification in stock makes sense as here risks and rewards are “reasonable understood.”
However, when it comes to cryptocurrencies, its reality is in the code which is very dense and hard to read and impossible for the masses to understand. Though there are whitepapers to counter that, they aren't as rigorously defined like code.
This is why Song explains, people go with marketing story, a shortcut that is easier and cheaper. But in the crypto market, there is no enforcement mechanism to ensure reality conforms.
“Instead, there are incentives to over-promise on the story and under-deliver on the reality.”
As we already know in the crypto market, many projects didn’t immediately deliver on what they promise, a point put forward by Song as well as he says it gives “coin’s developers plenty of excuses to delay.”
“Under-delivering the reality is another clear win for the coin’s development team. Promises that cost too much to deliver don’t have to be delivered at all.”
Song says the risk/reward ratio with cryptos are very high with permanent loss of capital being more likely. Hence, it’s no surprise, “so many scams have run amok.”
In the wake of reliance on marketing instead of technical reality and with incentives of over-promising and under-delivering, we have a “giant mess of an industry.” So the answer is to do your own research that means evaluating the code and a “much higher” scrutiny of altcoins.