The most common question I get emailed is along the lines of ‘which coins under $1 should I buy?’ This article will explain why the price of a cryptocurrency is almost irrelevant (there is a small advantage) and why market cap is far more important.
To begin, let’s look at the formula for price:
PRICE = MARKET CAP / CIRCULATING SUPPLY
A lot of people say price = market cap / supply but this is wrong, it is circulating supply that is important.
Now there are two assumptions we are going to make:
- The lower the market cap, the riskier a coin is.
- The lower the market cap, the easier a coin can increase in terms of percentage.
When people ask the question of ‘which coins under $1 should I buy?’, what they are really asking is which coins a great chance of have increasing by a large percentage. There is an argument that low cap cryptocurrencies have the greatest potential return on investment, however I personally don’t tend to go outside of the top 100.
There needs to be a balance of risk to reward.
The probabilities of a cryptocurrency being a scam or fraudulent or has no use increases drastically the lower down in terms of market cap you go. Yes, you could find a ‘golden’ cryptocurrency that increases 10,000% in a year BUT here is the truth:
99% of investors sell before this happens.
Opportunities come around so frequently in cryptocurrencies that yes, you may have lost out on a few big returners but the next one is around the corner and it doesn’t have to be in the extremely low market cap range.
I have invested in coins which were in the top 20 and have increased by more than 4,000%.
The point I am trying to emphasis is that now you understand that price is not that important and rather market cap, you need to also understand that LOW market cap does not mean HIGH investment return.
Finding the balance is key.
I’ll give an example:
Let’s say your target return is 1,000% and you had the following 3 coins to choose from:
These figures are not live prices, they are just to demonstrate a point.
If your target was an increase of 1,000% which coin would you choose?
Everything else being equal let’s add 50 billion to each market cap to see the percentage return…
As you can see from the above example, the highest percentage return was NEO, however NEO was clearly not the ‘cheapest’ coin to buy.
What causes the price to rise is for another article, there are many factors to it. The purpose of this article was to emphasize that price is not a leading indicator as to whether a coin will increase by a large percentage.
HOWEVER, it can be used as AN indicator…
This may sound extremely contradicting, but there is a psychological advantage to ‘cheap’ coins that attracts newer of less experienced investors. People like to accumulate as much of a coin as possible, it mentally makes them feel richer. Think about it like this:
COIN A: PRICED AT 15,000
COIN B: PRICED AT 0.01
If you had 1,000 Dollars would you rather haver
0.0666 of Coin A
100,000 of coin B.
To conclude, don’t go seeking ‘cheap’ coins. They do not guarantee any higher returns that higher priced coins. Remember that you do not need to own the entirety of a coin, most are divisible. Focus on market cap and circulating supply and then research as much as you can about that coin. If you find a project that sounds great and is under $1, then think of it having a slight advantage psychologically but.
Remember Bitcoin went from $1,000 to just under $20,000 last year, which is no different to a coin going from 0.01 to 0.2.
Hope that makes sense.
Feel free to share your thoughts with me at: Devin@emergingmarketsinvestmentclub.com
All the best,