Observations:
1. During the 2013 bubbles when the bitcoin price was high, the altcoins outperformed bitcoin in percentage terms.
In 2013, LTC went from $1 to $50 while BTC, during the same period, went from ~$120 to ~1150. LTC had nearly 5x the growth. NMC, PPC, and other altcoins also outperformed BTC. Now that bitcoin is low, altcoins have crashed much harder. Some other alts have died completely.
2. The same is true for small cap stocks and large cap stocks as well:
From 1958 to 1983 ... small caps out-performed large caps by 7.5 times in cumulative returns, with 2.5 times the average annual returns and only 53% higher risk.
When the price of stocks are high, smaller equities grow more. During crashes, many small caps will crash harder or even go out of business.
3. The same is true for gold and silver. Silver has a much smaller "market cap." During the commodities bull market (a macroeconomic trend) from 2008-2011, silver went from $10-$12/oz to $46/oz. 4x growth. During the same time period, gold went from $700-800/oz to $1805/oz. 2.4x growth.
Discussion:
It seems obvious to say that smaller investments are riskier and more volatile. But most people think of that in terms of events. (e.g. Whether or not a biotech company gets FDA approval for the drug it's working on). What I failed to realize until recently is that this is true on the macroeconomic scale as well:
If cryptocurrencies
in general are doing well, then we'd expect altcoins to do
even better than bitcoin. If cryptocurrency in general is doing poorly, we'd expect altcoins to
suffer even more than bitcoin. The is true independent of individual events or the individual merits of each cryptocurrency.
Conclusions:
If we can identify the beginning of a clear cryptocurrency-wide bull market, it is better to buy altcoins. Altcoins will grow more than bitcoin and it won't matter much which altcoins you own. The market will not be paying attention to the actual features and long-term potential of the altcoins. People will simply be buying everything that has to do with cryptocurrency and the smaller cryptos will go up more.
If we are unsure whether we're in a bull or bear market, owning bitcoin is best. Bitcoin won't crash as much as altcoins and likely won't die. It will still rise appreciably if the market turns bull. When the bull market becomes clear, we can switch to altcoins.
If we can identify the beginning of a clear cryptocurrency bear market, it's best to get out of the cryptocurrency completely. You can risk shorting bitcoin or altcoins, but event-driven short-term volatility can kill you even if you are right about a macro bear trend.
