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Bitcoin educator and entrepreneur, Jimmy Song, has posted on the benefits (or lack thereof) of a diverse cryptocurrency portfolio. He suggests a fresh argument as to why adding altcoins to a portfolio with Bitcoin makes little sense.
Why Not To Put All Your Eggs In One Basket
In a stock market scenario, the reason for diversification is to reduce volatility and optimise your risk/reward ratio. In buying 10 stocks instead of one, you hedge against any catastrophic failing in that one stock. Although the stock is also subject to certain transparency requirements, so its story and reality are likely to correlate pretty closely.
In contrast, for most cryptocurrencies, the story and reality could be poles apart. The reality lies in the code, which is incomprehensible to the majority of investors. It may not be even available, leaving just the white paper, or story, to go on. Cryptocurrency does not have the same checks and balances to ensure that these correlate. In fact, there can be an incentive for the development team to over-promise and under-deliver.
The true value can be vastly overinflated by the story, as that is all most people see. The reward therefore is often exaggerated, whilst the risk is underplayed. This does not reduce your exposure to volatility.
Why Bitcoin Is Different
When Bitcoin launched there was no incentive to over-promise or embellish the story. The market simply wasn’t there. The concept lived or died on the code, which was incidentally written before the white-paper and actually over-delivered.
Furthermore the Bitcoin code has been scrutinised by many thousands of people, who likely understand it better than you or I ever will. It is truly decentralised and open-source. Therefore, Song concludes that it does belong in your portfolio.
“The technical reality is usually only understood by a few and everyone else trusts that what the creators put into the whitepaper reflects reality,” explains Song. “There is nothing to really enforce that the story and reality conform, and instead the information about the coin comes from a small number of people that created the coin.”
He goes on to consider altcoins based heavily on the Bitcoin code such as Litecoin, or forks such as Bitcoin Cash and SV. However, due to the lack of major positive differences, and often worse maintenance of the codebase, these do not tend to give the desired benefits of risk and volatility reduction.
Most coins are not vetted beyond the marketing story making sense (and sometimes, not even that!), and result in a giant inverted trust pyramid with the founder at the bottom.
So What Else Should You Invest In?
So you have some bitcoin, what else do you need? According to Song, you should do your own research, and as the story can’t be trusted, this means examining the code. Which you are likely to be either unable to do (non-coder, closed source or not available), or unwilling to put the time into.
Obviously, you can’t trust the opinions you read/hear online to be unbiased. So the only conclusion, according to Song, is that, once you have Bitcoin in your portfolio, there is little point diversifying into other altcoins.
"Diversifying" from Bitcoin to other so called cryptocurrencies is like saying you should diversify from $US to Boliviar and Zimbabwean $. It's a REALLY BAD idea..
— Andersmathbot.com (@Anders_) May 21, 2019
Do you agree with Song that diversification in altcoins makes very little sense? Share your thoughts below!
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The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.