ASSUMPTIONS
Before we get into the not-so-secret "Secret Sauce" for identifying deep value in Low-Cap cryptocurrencies, let's establish some assumptions that I'm making when conducting my market analysis.
0. IMPORTANT REMINDER:
I like to have no less than 50% of my crypto portfolio in BTC. Any token or "alt coin" that I invest in must have a much higher upside potential than BTC (read my analysis of the future upward price potential of BTC in the context of the current existing global fiat market cap relative to the cumulative cryptocurrency market cap).
1. Market Cap = Price x Supply
This simple relationship is the foundation of everything else we're going to build upon. We must understand the fundamental significance of this equation which defines market capitalization. The price of a coin has little to do with it's potential for percentage growth. The price in the context of the supply defines the market capitalization, which is the true measure of potential for percentage growth.
If we want to have a realistic range of possible growth for a small cap alt coin we're interested in, we need to have an idea of what the upper range for a very successful project would look like. A large part of what I'm doing with my market analysis is to project the percentage growth between an alt coin's current market cap and the market cap of a very successful alt coin.
In this analysis, I use a market cap of $50 Billion as the projected target. I'm constantly asking the question, "how much percentage increase can a coin have if it goes from its present market cap to $50 Billion?" I'm not attempting to perform a technical analysis of the chart to analyze the potential specific future price. I'm projecting the ceiling on the near term future market cap so that I can assess the maximum potential for upward percentage growth absent any knowledge of the coin's price and supply. The hard boundary on growth is set by the market cap and nothing else.
Because of the relationship between market cap, supply, and price, I don't need to know the current price of a coin in order to project its percentage growth ceiling based on its market capitalization alone. It's critical that you understand this. Try to manipulate this equation into it's three forms before you continue through the remaining assumptions for my #FluxCapacitor and #DeLorean level market cap analysis below:
market cap = price x supply
price = market cap / supply
supply = market cap / price
Hypothetical Token with supply of 10 Million and market cap of $10 Million
$10 Mil (market cap) = $1 (price) x 10 Mil (supply)
$1 (price) = $10 Mil (market cap) / 10 Mil (supply)
10 Mil (supply) = $10 Mil (market cap) / $1 (price)
Same Hypothetical Token with market cap of $50 Billion
$50 Bil (market cap) = $5,000 (price) x 10 Mil (supply)
$5,000 (price) = $50 Bil (market cap) / 10 Mil (supply)
10 Mil (supply) = $50 Bil (market cap) / $5,000 (price)
2. Bitcoin (BTC) will always occupy the #1 position by market capitalization
I didn't believe this in 2017-2018 when I first began mining Ethereum. I thought smart contracts would cause "the flippening"... but now I see that layer 2 is enabling smart contracts on parallel chains like RSK network to enable Smart Bitcoin (rBTC). Bitcoin will always retain the highest market cap of all cryptocurrencies. Since I do not expect any alts to surpass the market capitalization of Bitcoin, I can certainly consider BTC's current market cap of ~$1 Trillion as my absolutely ridiculous upper limit on the possible near term future projected market capitalization of any alt coin which I'm evaluating.
3. I'm using a market cap of $50 Billion as our projected ceiling
I often use the market capitalization value of the 3rd highest ranked coin by market cap at present to establish a future market cap ceiling for successful alt coins in the next 3-5 years. The present market capitalization of Ethereum (ETH), in the #2 spot at ~$250 Billion, can serve as a more conservative market cap ceiling (as opposed to using Bitcoin) for our alt coin percentage growth ceiling projections. However, I prefer to use an even more conservative upper limit market cap projection based on the present market cap of the coin in the #3 position. At the moment, it's BINANCE Coin (BNB) with a market cap of ~$50 Billion.
Using the #3 spot as our projected upper market cap ceiling for low-cap cryptocurrencies we're evaluating assumes that the very top market cap positions will always be occupied by Bitcoin and a couple of other projects. So, no matter how well any alt coin does, it's virtually impossible for it to supplant the market caps of Bitcoin and Ethereum. Moreover, we're also assuming that the market cap of the entire market will continue to trend upwards (though we'll surely have some bear market buying opportunities along the way), so the existing #1 & #2 market cap positions will increase substantially during our short-term time horizon of 3-5 years.
We're not projecting the potential ceiling on percentage gains based on a token moving to the future #3 position. The present market cap positions from #4 to #100 will eventually climb to the range of the present market cap of the #3 position. As the macro trend from fiat currencies to cryptocurrencies continues, there will be a time (hopefully in our short-term time horizon of 3-5 years) when a few dozen coins have a market cap over $50 Billion. The entire crypto market cap will 10x in the next 3-5 years from $2 Trillion to $20 Trillion.
4. I use very optimistic percentage growth "ceiling" projections
My short-term market cap percentage growth ceiling projections consider very aggressive growth to reach the top 50 coins by market cap in the next several years. That's the very best case scenario. That's why I call it a "ceiling" projection. It's not a "price predication", it's a way of conceptualizing the range of opportunity based on a real world upper threshold. Establishing these bounds and conceptual parameters helps us to develop a strategy to reach our goals. I'm looking for gains in excess of 1000x in the short term. That's very unlikely to happen in the short term with market caps already in the billions.
So I need to focus on lower market cap projects which are subject to greater risk, but also have more room to grow. Over the next 3-5 years, even with the most optimal gains, l can expect a ceiling of NO MORE than a 10x return from a top performing alt coin with a current market capitalization of $5 Billion and a ceiling of NO MORE than a 100x return from a top performing alt coin with a current market capitalization of $500 Million. However, if I invest in the most successful projects with market caps as low as $50 Million, I could see 1000x returns. If I manage to find an absolute gold mine project very early on, with a market market cap as low as $5 Million, I could see 10,000x returns in 3-5 years. In every case, we're talking about a path toward a market cap of $50 Billion.
5. The sweet spot for optimal growth is market capitalization between $10 Million and $50 Million
There are presently 9,125 cryptocurrencies listed on coinmarketcap. This means that if you learned about 25 new projects every day, it would still take you 1 year just to have learned about all of the possible cryptos you could gamble on instead of investing in a guaranteed winner like Bitcoin. The top 10 to 100 cryptocurrencies by market cap receive the most attention, but they have relatively low short-term percentage growth potential because they have already reached very large market caps and we've established in assumption #1 that no coin will surpass Bitcoin's market cap.
On the other end of the spectrum, there are about 8,000 coins with market caps below $5 Million. Several hundred of these coins will see gains in the 10,000% range, however, finding and betting on the right ones is nearly impossible. Moreover, for every 1 token in the range below $5 Million market cap that has a price explosion... hundreds will go to zero. It's a losing game to try to guess which of these 8,000 tokens will turn a $1,000 investment into $10,000,000. Anything with a market capitalization below $5 Million is in great danger of market manipulation from whales moving a few million in and out of the coin, or pump and dump groups playing silly games.
So the sweet spot for my optimal growth to risk ratio is a market capitalization between $5 Million and $50 Million. $5 Million is generally too low unless you are a devoted community member and have unwavering faith in and knowledge of the project. Those are the exception cases where we might take a concentrated position in an ultra-low micro-cap project. But generally the absolute sweet spot for a big entry is between $10 Million and $50 Million market cap.
WE NEED MORE (NON-SHITCOIN) SMALL CAP EXPOSURE
Okay, so we've broken down the entire crypto market by market capitalization and we've defined the market cap range between $5 Million and $50 Million as our first target when seeking optimal value for growth potential. But there are a lot of projects out there and it takes times to find the most promising opportunities.
A great way to start thinking about this strategy is to consider your existing cryptocurrency holdings. How many different alt coins are you holding? Are you holding many smaller "diversified positions" or are you taking a handful of more concentrated positions for optimal growth? What is the market cap of your largest alt coin holding? What is the smallest market cap alt coin that you are presently holding? As you ask yourself these questions and begin to become more familiar with the implications of market capitalization in your present portfolio, you will likely find that most of your alt coin positions have market caps over $500 Million and many in the Billions.
Most of us have virtually zero low and micro market cap cryptocurrencies. I have a huge bag of mid and large cap alt coins. I'm glad I have them and I'm not planning to sell them. However, I want to begin constructing a portion of my portfolio that could have much greater upside potential in ideal market conditions. I'm concentrating on finding deep value in low-cap blockchain projects, so I've defined a few tiers that I can use to evaluate token fundamentals. This is the way I think of it:
Tier 1 - #FluxCapacitorHyperGrowth
$5 Mil - $50 Mil Market Cap Range
10,000x - 1,000x 3-5 yr growth ceiling (Micro Cap Range)
Tier 2 - #FluxCapacitorMicroBreakout
$51 Mil - $100 Mil Market Cap Range
1,000x - 500x 3-5 yr growth ceiling (Micro Breakout Range)
Tier 3 - #DeLoreanAcceleration
$101 Mil - $200 Mil Market Cap Range
500x - 250x 3-5 yr growth ceiling (Small Cap Range)
Tier 4 - #DeLoreanCruiseControl
$201 Mil - $500 Mil Market Cap Range
250x - 100x 3-5 yr growth ceiling (Small Cap Breakout Range)
READY FOR THE NOT-SO-SECRET SAUCE?
Alright, great, now we're on the same page and we can proceed with a shared perspective. Remember that we're searching for the deepest value in the low-cap range. We're being greedy with 50% of our portfolio. Projected BTC returns in the 10x and 100x range aren't good enough for us. We want 1000x and 10,000x gains. This means we assume considerable risk, but we try to mitigate this risk by choosing high quality projects with enthusiastic communities. This exercise is only one strategy for conceptualizing a road map with the least obstacles to finding those treasured small-cap opportunities. We've restricted our search to market caps between $5 Million and $500 Million. That excludes the top 127 cryptocurrencies with market cap greater than $500 Million. There are 446 coins with market cap between $50 Million and $500 Million. There are 644 coins with market cap between $5 Million and $50 Million.
We'll need to take a handful of highly concentrated positions in the $5 Million to $50 Million market cap range in order to achieve gains in excess of 1000x in our portfolio over the short-term time horizon of 3-5 years. It's also a certainty that many of these alts will be worthless and Bitcoin will surge ahead to $1 Million, so don't get lost in this alt coin labyrinth. We have to keep lazer focus now to dredge the gold out of this list. Otherwise, we would be better off just sticking with Bitcoin, Ethereum, and a small portfolio of mid and large cap alt coins. We've narrowed our list down to about 1,000 coins. But we want to zero in on the 644 coins in the micro cap range #FluxCapacitorHyperGrowth.
1. Use Your Knowledge of Market Cap To Avoid Common Erroneous Decisions
There is no substitute for the in-depth market research that is necessary at this stage before committing a few large sums to a handful of these 1,000 tokens. However, there are some common errors that you can avoid here. Many people fail to comprehend that the per token price relative to other tokens with the same market cap is basically irrelevant. The price will vary from token to token based on the token's supply. So don't make the critical error of eliminating hundreds of these potential gems because the price is above and arbitrary threshold that feels high to you, or because you are hoping to get more quantity of tokens. We've already established that the most critical market fundamental which defines the projected percentage growth ceiling of any token is the market cap. So if you are comparing two tokens which each have a fairly low market cap of $10 Million, you might think the token with a price of $0.01 looks like a better value than the one with a price of $1.00. However, you will find that when evaluating two tokens with the same market cap, the token which is 100 times less expensive also has a supply which is 100 times higher. This is a function of the three variable relationship between market cap, price, and supply. We've narrowed our list down to about 1,000 tokens with a market cap of between $5 Million and $500 Million. We're not going to make the rookie mistake of ignoring everything over $1 or $10 or some other arbitrary designation. If every coin had the same supply we could use price as a correlate for growth potential. However, since these thousands of coins have vastly different supplies and supply models, market cap is our best proxy for growth potential.
2. Evaluate The "Tokenomics"
Not every blockchain project needs to issue its own token. However, if the use-case necessitates minting a token and we're considering buying this token, then it's important that the token ecosystem creates demand for the token as well as supply side pressure. Projects that only mint tokens with no utility collapse because the sell pressure on the tokens is too high. Projects that don't provide a way to buy and earn tokens fail because there is no demand to acquire, hold, and use the token.
Supply fundamentals are vital to comprehend as well. Many coins are inflationary, which means they have an unlimited maximum supply. In the inflationary model, each time a transaction occurs on the network the network nodes are compensated with newly minted coins. This devalues the currency and restricts upward price movement. Inflationary currencies are less likely to appreciate in value as significantly as a currency with a relatively low maximum supply. Explore whether the value of the coin is restricted in some other way. See if the tokenomics ecosystem makes sense to you.
In many cases, projects issue "Governance" tokens which have little utility other than to stake for voting on project improvement proposals and to stake for rewards. Nonetheless, many so-called "Governance" tokens grow to fantastically large market caps. The essential aspect of evaluating a project's "tokenomics" is to get a small quantity of their tokens and experiment with all of the ways that you might use them or earn more of them. Tokenomics can make much more sense when you've used the products, if they exist.
3. Use The Products If They Exist
It's one thing to buy a big bag of a top 10 crypto without having used the product at all. However, when you're looking for value in low-cap blockchain projects, you must roll up your sleeves and use the beta versions of dAapps. If there is no product to use the risk is much greater. I am not easy to persuade to invest in projects which have not built anything that I can use. I make some exceptions, however, I prefer to have confidence in the utility of the product even over seeing an enthusiastic community. Does the tech provide value to me? Can I see the tech providing value to a mass adoption user-base? The larger the use-case, the greater the upper market cap and price potential, so I need to use the product, if there is one.
4. Interact With The Communities First
Getting involved with a project's community is the best way to gauge the overall sentiment and pace of development. Look for positive and negative engagement. How does the project handle criticism and failures? How often do the project's social media admins interact with the community. If you're evaluating a token with a market cap of below $50 Million, you might even be able to get in touch with key members of the project directly. See how accessible the community is via social media. How many followers are in Telegram and on Twitter? Start a few conversations with other community members with who you can share perspectives and ask questions about the project. When it comes to big low-cap entries, I always start by joining the community and then purchasing tokens after I am satisfied that the project has a degree of possibility for success. I recently bought tokens first and engaged with the community after and realized that the project was in a pretty hopeless condition and the community was a small band of long hauler bag holders who were persistently badgering the unresponsive devs for project updates. That's something you really don't want to see after you've decided to invest.
5. Beware of Low Liquidity Exchanges
I almost left this one out because it's not quite relevant to identifying deep value, but it actually is pretty important to caution you when dealing with low cap and micro cap coins that there are very few exchanges where you may buy them. Generally, these exchanges are not the most reputable and the trading volume is very low, which results in large spreads between the highest buy orders and lowest sell orders. You may not be able to avoid using a low liquidity exchange if it's the only way to get the tokens you're looking for. However, if a low-liquidity exchange is the only way to get a token that means it's not on any decentralized exchanges which concerns me. We want our tokens to have easily accessible liquidity in decentralized exchanges.
6. Take Concentrated Positions, But Enter Slowly
We're looking for a few needles in a haystack. And it's going to take some time and research to find the opportunities which seem to have the most promising fundamentals, competent leadership, working products, enormous use case, and enthusiastic communities which appear to be interacting positively with the developers. It's so important to take a highly concentrated position once you've identified a low-cap value opportunity. However, you don't need to enter all at once. I like to enter over 3-5 large buys over several weeks and then switch to dollar cost averaging if I choose to continue building my position.
GO FIND YOUR NEEDLE IN THE HAYSTACK
Now it's time to get hunting for value. Get on Coinmarketcap and Coingecko and scroll to the lower market cap ranges we've been discussing. There will be some names that look familiar, but most of the coins in this range are going to be less familiar to us. There are over 1,000 projects to consider. We are looking now for more specific information on the price movement of each individual project we are considering. We'll examine the recent chart activity and the previous all-time-high. We're looking to see how far back the coin's market data goes. Is it only a few months old or several years? Narrowing your search by sector can be very helpful also. If you are particularly bullish on a given sector of the crypto economy, this method can be an excellent way to discover new projects within a sector which still have room to grow.
We talked about optimizing our investment model for growth. I always caution that we should have at least 50% of our cryptocurrency holdings in Bitcoin (but I can't seem to remain disciplined in this myself), because while many of these alt coins really have tremendous potential for growth, they are extremely volatile and risky investments in general. With that said, my strategy now is to try to take a handful of highly concentrated positions in ultra-low market cap projects, but not before having done a really deep due diligence. At the moment, my goal is to find a handful of projects with a market cap under $50 Million and a broad use-case with potential to reach $50 Billion (1000x) market capitalization in 3-5 years.
I want to have $10,000 invested in a project with a market cap under $50 Million. When the project hits 10x growth, I'll have $100k invested at $500 Million market cap. When project hits 100x growth, I'll have $1 Million invested at $5 Billion market cap. When project hits 1000x growth, I'll have $10 Million invested at $50 Billion market cap. If I can find a project in this range that is worth investing $10,000 into, it could be a game changer. But it could also be a waste of $10,000 that could have gone into Bitcoin. Check back for my next post because I'm going to be applying my "Secret Sauce" over the next few days to dredge up some deep value from small-cap blockchain projects.
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