From Dogecoin to Cardano: Should You Take Altcoins Seriously?

Investing in altcoins is a high risk high reward game. Learn more about what makes these cryptocurrencies risky and the right questions to ask.

There remains a persistent undertone of skepticism whenever the topic of cryptocurrency is brought up, and for a good reason. Bitcoin—the defacto standard for cryptocurrencies—has its laundry list of reasonable criticisms.

  • Largely speculative market
  • Slow and expensive compared to traditional payment services and other cryptocurrencies
  • Never been a better solution for money laundering
  • Unregulated
  • Lack of protection if your hard drive is lost or corrupted
  • High Market Volatility

Despite these well-known deficiencies, Bitcoin defies detractors and remains relevant and more resilient than experts expected.

Bitcoin graph of 2020-2021 1-year exchange data
Bitcoin 1-year exchange data

Just as there is a laundry list of cons, there are compelling arguments for Bitcoin that institutions and the everyday investors have been buying. The alternative to fiat, the bitcoin gold standard, and the potential to disrupt traditional banking services offer an attractive looking glass into the future. So what about the almost 9000 other altcoins out there.

Should You Take Altcoins Seriously?

The answer depends on your appetite for risk. From the meteoric rise of dogecoin, the resiliency of Etherium, to US federal investigations into PayCoin, there are many different alt-coins out there that have popped up or disappeared. In the case of Dogecoin, it is difficult to pinpoint why it skyrocketed into the stratosphere other than that people just started buying it. This speculative nature of the market makes investing in altcoins, let alone attempting to time it, such a high-risk endeavor. Learning and investing in traditional markets may be best for those who are more risk-averse.

It is not uncommon to compare altcoins to penny stocks. Like penny stocks, altcoins have low market caps and are vulnerable to massive price swings that attract short-term traders looking to make a quick dollar. Sometimes they do make that quick buck. Unfortunately, cryptocurrency price swings are often the result of the news and rumor, where you need more luck than savvy investing. Even Bitcoin, arguably the most stable, has seen extreme variance in the last 10 years and presents dangerous levels of risk. To a greater extent, altcoins are even more dangerous where many currencies rise and fall without ever recovering.

Table of Bitcoin's major corrections from all-time highs
Bitcoin: Major corrections from all-time highs

Much like the wild-wild-west, if you can dodge dysentery, wolves, starvation, bandits, a long winter, and make it to the promised land, you might strike gold. There are unique and exciting proof-of-concept altcoins that may very well be a worthwhile investment. However, If you are going to invest in altcoins, then know the game you are playing. There is no 'secret sauce' to finding the next 10x altcoin and the risk is sky high. So do your due diligence and understand who is behind the cryptocurrency and their value proposition.

Due-Diligence and Some Questions To Ask

In traditional markets, a measured and prudent investment approach can vary widely, but it all begins with research. To minimize your risk, you need to know what you are buying. Unfortunately, there are significantly fewer factors available to analyze cryptocurrencies—hence the speculative nature of the marketplace. Valuation or putting a price on any given altcoin becomes nearly impossible, however you may still find a cryptocurrency as a worthwhile investment for yourself.

Here are a few questions to ask yourself when looking at a particular cryptocurrency:

  • What is the business model and how does the company's white paper hold up?
  • Who are the developers and the team behind the cryptocurrency?
  • Have you checked out their website?
  • What is their unique value proposition? Are there any other coins doing something similar?
  • Who are their partners?
  • How transparent are they?
  • Have you carefully looked over their Initial Coin Offering (ICO)?
  • How does the cryptocurrency stack up against others in the marketplace?
  • Is there a substantial risk of theft or loss, including from hacking?
  • Can you sell when you want to?

As you continue on your research, you will add more questions and answers to your list. Just as in traditional markets, doing your due diligence won't guarantee returns or protect you from losses. Additionally, as a more or less unregulated investment, you are not protected from theft or scams. Cryptocurrency is still very young and enigmatic as an asset class. Those looking to invest in altcoins should be prepared to play the game and the game is high risk high reward.

Stephen Lee

Stephen Lee is a Senior Research Analyst at ValueChampion, specializing in insurance. He holds a Bachelor of Arts degree in International Studies from the University of Washington, and his prior work experience include risk management and underwriting for professional liability and specialty insurance at Victor Insurance. Additionally, Stephen is a former US Peace Corps Volunteer in Myanmar (serving between 2018-2020), where he continues to provide business development consulting services to HR companies in Asia Pacific.