Investing on Small Cap Cryptos: Most Common Mistakes

Why is investing in small-cap crypto projects the best investment for maximizing returns?

When investing in cryptos, people always look for the best investment that maximizes profits. Every day millions of inexperienced investors jump on cryptocurrencies in search of the best return on investment.

Everyone gets into heated debates about the future coin that will make mind-boggling growth percentages. Yet only a few make money from the markets.

The main problem among cryptocurrency investors is that they do not use mathematics. Conversely, stock market investors frequently use mathematical analysis (profit analysis, asset analysis, beta analysis, … )

Most crypto investors do not use math to identify the best investment. They rely on qualitative analysis of the project. Qualitative analysis is a great idea, but this analysis is not enough to maximize profits.

What really determines the success of an investment is the mathematical calculation. When the market is bullish, everything goes up, even unattractive projects. The project with an excellent product has an advantage, but that advantage could be wiped out by disadvantageous math.

A mediocre project with advantageous math is much more profitable than an attractive project with unprofitable math.

That is why I pay more attention to quantitative than qualitative analysis.

Qualitative analysis: small cap cryptos

Qualitative analysis of a project (the most common approach) involves evaluating the project and its roadmap. This approach tends to prioritize the utility of the project.

It certainly might be a fair approach for those who want to hold for ten years, but it is not very useful if you only hold for a bullish season (an average season lasts one year).

In fact, throughout a bullish season, everything goes up, and the qualitatively better projects do not go up faster than others. Projects with a utility have an advantage in the long term but do not always grow faster in the short term.

The qualitative approach excludes meme coins, which are included in the purely quantitative analysis. Memecoins are projects without any utility, so they are systematically avoided. Nothing could be more wrong, in my opinion.

In the short term, qualitative analyses are almost useless. If qualitative analysts focused a little more on basic mathematical concepts, they would be much more successful.

For example, one mathematical concept that could come in handy is the following: “when numbers are near zero, their growth potential is very high.”

What does this mean?

How easy is it to multiply a number near zero? It is as simple as that. Imagine how easy it is to multiply your capital if you invest in a project near zero…

Quantitative analysis: small cap cryptos

But what is meant by math?

When investing in a crypto project, the first thing to do is to look at the market cap numbers.

The market cap represents the overall value of the project. How is the market cap calculated?

The market cap simply corresponds to liquidity. How many BNBs or BUSDs are in the liquidity? This is the market cap (On average, DEFI tends to manipulate that number slightly, but that will be the subject of another article).

The market cap is critical because we need it to assess our ability to multiply our capital.

As investors, we want to invest in a project with a market cap that easily multiplies.

Which market cap doubles most easily?

Game of Dragons: $400,000

Shiba Inu: $6,000,000,000

Is it easier to double a $400,000 project or a $6 billion project?

The answer is simple. To double the former, you need to find another $400,000; to double the latter, you need to find $6 billion.

That is why small projects tend to grow faster than large projects because it is easier to double their market cap.

If you look at the history of any small-cap crypto project, you realize that in the early part of its life, the growth is in the triple digits (e.g., 1000%). As the market cap swells, the speed of the project’s growth decreases to single digits (e.g., 2%). For example, now Bitcoin is still growing at double digits, but compared to its beginnings (until 2017), the growth rate has decreased significantly. Until 2017, Bitcoin had growth rates above 1000%.

In 2020, the highest Bitcoin reached a growth rate of 300%. Growth rates are decreasing.

This trend is the same for all cryptocurrencies. Imagine that you invested in Bitcoin in 2012 before the 5000% boom. An investment of 100$ would have turned into $500,000. Such capital growth would have been impossible in 2020, when the market cap was 400 billion.

In 2020 the market cap was too high (about 400 billion), and the growth was more negligible (about 300%).

The Price Trap (The Shiba INU Case)

Newcomers to cryptocurrencies, looking for great opportunities, routinely fall into the price trap.

They look for small-cap crypto gems in the price. A token with a low price (e.g., $0.0000009 per token) is undoubtedly a small-cap gem. False! What matters is the market cap.

The price is meaningless because the token creators can manipulate it. The price can be manipulated even when issuing stocks on Nasdaq. The price is always manipulatable. Issue more stocks, and you lower it.

Whoever controls the number of tokens issued can also control their price. The price of a token (or stock) is the result of the expression:

 

Market cap/Number of tokens

 

It is a numerical expression that can be manipulated by changing the denominator.

That is why you should never rely on price. A $6 billion monster like Shiba Inu has a derisory price, but its speed of growth is that of a slow and clumsy giant. In fact, its market cap is enormous.

The only way to determine whether a project is a small-cap is through market cap analysis. Price counts for nothing.

Conclusion

We have seen that to find small-cap cryptos, one should not look at the project’s price or utility but the market cap. Indeed, qualitative analysis can be integrated, but only after identifying projects that we have advantageous math.