Bitcoin has been moving sideways with decent 40% dominance, and market greed is pretty high, with overall market sentiment being positive. While all this is bullish, at least for a few months ahead, this is also a very good time for altcoins to make insane 100x or 50x quick gains. The altcoin season is upon us. I wouldn't necessarily call it specific to memecoins though, just specific to low to mid-cap alts.
At present, a heck ton of crypto investors & traders are looking for their next big coin or project. This is clearly evident if you look at recent aggressive marketing in cities like London & Dubai (see Floki Inu). This means that there is a class of retail and institutional investors who are actively looking for the next big thing. But here is the deal, a simple backtesting analysis will show you that such investors will almost always fail. For instance, have a look at historical CoinMarketCap December-2017 data. Many of the projects in the top 100 failed and didn't recover, let alone the low-caps and micro-caps. The reason for it is pretty simple, there is an extremely high number of factors that influence a project's success: Project marketing, launch timing, VC involvement, fundamentals, the extent of decentralization, tokenomics and other technical factors. Heck, even the name/logo of a Crypto and how iconic & memorable it is matters.
Furthermore, given the very nature of blockchain and DeFi, it's easy to make a scam token and market it as the next big thing. Here's a Coldfusion video of how a woman talked her way to scamming billions of dollars from retail investors. One more notable example is BITCONNNEEEEEECT.
Now, even if we assume a crypto project is genuine, and actually provides utility and value, even then there are a lot of variables at play. For instance, a hot & new meme-coin might have a very high 10,000% ROI, but it will have a pretty low Sharpe ratio. Sharpe ratio is basically a measure of the Reward-To-Risk. Basically, the higher the Sharpe ratio, the higher are the rewards (ROI) per unit risk (standard deviation). Eth notably has one of the best Sharpe ratios in the crypto market, and it's not a coincidence why Eth is loved so much on this sub. Just from a purely gains point-of-view, Eth has excellent technical parameters.
Furthermore, a micro-cap is way more vulnerable to BTC crash or even a correction. A 20% dip on BTC can potentially destroy hundreds of micro-caps, while it may not affect something like LINK in a similar devastating manner. Basically, a potential 100x coin is very much vulnerable to external factors and random dips.
Given the ease of making a micro-cap token, extremely low reward-to-risk ratio and just the element of randomness & general volatility of the Crypto space, it's indispensable that you understand the risk of investing in "the next big thing". I'm not suggesting completely ignoring the potentially great micro-caps, what I'm saying is to practise caution before pulling the trigger. For instance, investing 20%+ of your portfolio on a micro-cap of less than $ 500 million is certainly a recipe for disaster. One dip can wreak havoc on your investments. I'd suggest not allotting anything more than 5% to micro-caps.
One really effective way to reduce this risk is to see if the said coin is listed on a reputable exchange like Binance or KuCoin, as these exchanges do perform extensive research & background checks on a Crypto project. Also, it's not a bad idea to look into small-cap stocks in NYSE or Nasdaq. Because unlike in crypto, all small-cap stocks and companies are extensively verified & scrutinized by the SEC before they are listed.
So all-in-all, it's completely alright if you just stick to blue-chip crypto and just ignore the small caps, over the years a simple blue-chip portfolio with small & consistent investments will fare very well and give amazing returns, thanks to the power of compounding.
submitted by /u/Gaious_Octavious