Startup Cryptos: How to Spot a Doomed Coin
Most of today’s big-name companies started as small unknown companies. In 1989, Microsoft was a small company whose stock sold for $6 a share. In 1991, Cisco stock was just $3 a share, Both of these stocks have since split several times.
These companies used their investors’ money wisely and grew into major powerhouses in the world economy.
Many professional investors look for gold only in the darkness. They are looking for the next Microsoft. They are looking for a small start-up company that will grow into an international giant.
They are not looking for a name-brand CEO with the silver hair, the Ivy-League degree, and the movie-star smile. Many are looking for an entrepreneur, laboring away in a basement or garage, working on the next product that will solve the next big problem facing humanity.
But here’s what separates the successful investors from the failures…
Take Smart Risks
My rich dad explained to me the importance of knowing the risks, the rewards of having a winning strategy that included losing. He was also aware that the reward for making it only one out of ten times far outweighed the risk of losing nine out of ten times.
He explained his position by saying, “Most people think only in the realm of what is smart and what is risky. Financially intelligent people think in terms of risk and reward.
In other words, instead of immediately saying something is too risky, or right or wrong, good or bad, financially intelligent people weigh the risks and they weigh the rewards. If the rewards are great enough, they will come up with a strategy or a plan that will increase their chances of success, regardless of how many times they will lose before they will win.
But to weigh the risk versus reward, first you have to educate yourself about the risk…
Not all start-up companies do as well—in fact, I think the failure rate is something like nine out of ten—and the investors lose most, if not all, of their front money. When I began investing, I often bought stocks of small companies, especially start-ups.
In the cryptocurrency universe, I see a lot of similarities to those start-ups.
Jeff Wang, a cryptocurrency expert that I met a year or so ago, gives an alert for cryptocurrency investors regarding what he calls the, “No News Zone” when it comes to start-up cryptocurrencies.
You should listen to what Jeff has to say below…
No News Zone
From Jeff Wang:
Every few months, I like to share a few trading observations that I think are worth pointing out in detail. One of these observations is the period of time when a cryptocurrency project comes out and goes silent.
This can be in the form of many things:
- When the creating team offers no blog updates and creates an impression of a lack of transparency
- The project’s Twitter handle goes quiet
- Community members stop answering questions in the telegram and discord chats showing a decline in interest.
This could be several reasons a project goes silent. They may be working on the product itself. This takes a lot of time and energy and often the silence is from the project team being so focused on their project.
It is also very possible that at the time they have nothing new to report. They could be working on the project but have not finished anything yet and so there is nothing to communicate outward.
Perhaps the project does not have the team or time to maintain a media presence.
Or possibly the worst possibility, the project team simply ran away with the funds. Obviously, the running away of the funds scares people.
What we see happening is the price of projects pump on the excitement and news releases. Once the initial “high” passes, a trickle-down in price occurs. This downward slope will usually continue until the next update (or social media push by others). We recently saw Elon Musk create a media push/frenzy when he posted his love of dogecoin. The price shot up with the initial excitement and then declined shortly after.
This consistent pattern of the “pump” followed by the dump is because people look at their holdings all the time, and when they see a stale project, they’ll swap their funds elsewhere.
Crypto investors do not hold for the long haul (Bitcoin investors excluded). They actively trade their crypto positions as a swing trader which is very similar to a stock market day trader. This behavior by most crypto investors often leads to an almost linear bleeding chart with the price continuously heading lower.
The other reality, of course, is if someone holds a huge percentage of the project, they’ll need to sell it slowly or risk causing a flash crash on the price.
This trickle-down in price is what I’ll call the “no news zone of death”, where no news becomes hazardous to the project’s value. Often a project will do a few things to stay relevant and prevent the projects from bleeding out:
- Partnership updates are common. A coin may often partner with another project to create a buzz and stay in the news and minds of the crypto investors
- Projects will trickle some of the novel concepts their coin is trying to solve (or just random tweets and telegram announcements)
- Hold interviews and “Ask Me Anything sessions” are a popular and effective way to stay relevant
- Staggering their exchange listings
There are more of these strategies, but these explain a lot of price behavior for projects that are new and start trickling down as well as the behaviors of the project team to prevent the downward pull. Typically, a swing trader wants to capture gains at these big news moments (because a premium is present).
On the flip side, the no news moments present good (but risky) buying opportunities. If you know that news is coming out on the horizon, but the chart is caught in the zone of death, it’s a great risk-reward play to buy something that has zero activity because it has a huge upside when the news finally hits. This is often called “value buying”. However, and be warned, it doesn’t work if the project has gone radio silent because the developers have abandoned the project.
Possible actions: In summary, swing traders can sell just after a major news event hits. Buy and hold traders should tough through the zone of death, and value buyers should look for projects that have news coming up but are in the zone of death, basically, your buy low, sell high strategy. Good luck out there!
See What Others Cannot See
Jeff’s a great ally in my quest to bring financial literacy. He understands how to see underneath the surface to size up the risks of a crypto investment.
I am often asked, “How do I find a good investment?” My answer is, “You must train your brain to see what others cannot see.”
Rich dad would say, “A piece of real estate is a piece of real estate. A company’s stock certificate is a company’s stock certificate. You can see those things.
But it’s what you can’t see that’s important. It’s the deal, the financial agreement, the market, the management, the risk factors, the cash flow, the corporate structuring, the tax laws, and a thousand other things that make something a good investment or not.”
So the first step to seeing what other people cannot is through financial literacy. It begins with the ability to understand the words and the number systems of capitalism. If you don’t understand the words or the numbers, you might as well be speaking a foreign language.
I disagree when someone says to me, “It takes money to make money.” In my opinion, the ability to make money with money begins with understanding the words and the numbers. As my rich dad always said, “If money is not first in your head, it won’t stick to your hands.”
Editor, Rich Dad Poor Dad Daily