Imagine you want to invest $20 in crypto. Your friend told you about their cousin's neighbor who became a crypto millionaire, and now you want to get in on the action. You open up an account on Coinbase, deposit your $20, and are immediately overwhelmed by the sheer number of cryptocurrencies to choose from. You're drawn to two options, DrewCoin, which is $100 (you could buy .2), or FancyCoin, which costs $0.0002 (you could buy 100,000). Which are you more likely to buy? What if your goal was specifically to pick a "long shot," something you were aware would likely lose, but would skyrocket (and make you a ton of money) if it succeeded. Would that change your answer, or help you make a decision? If you chose one over the other for any reason (other than the cool name of the first one 😉), you are at risk of falling prey to one of the most manipulative schemes in cryptocurrency today, which takes advantage of two logical fallacies many new traders have.
Logical Fallacy #1: More Coins Are Better
Have you seen this optical illusion before? Both lines are exactly the same length, but our brains see the top one as longer at first glance (and beyond). It's called the Muller-Lyer illusion, and it perfectly illustrates how egregious this first logical fallacy is. You'd never bet someone $20 that the top line is longer than the bottom line, but that's basically what happens when someone chooses which crypto to buy based on price. Price is like the arrows on the ends, it changes how the lines appear at first glance, but isn't actually relevant to the decision. People fall prey to this in two ways. First, some simply don't know that they can buy fractional shares. Most cryptocurrencies can be bought and sold down the the thousandth of a share, so having a small amount of money to invest is no reason to limit yourself to cheap coins. Second, there's just something that feels good about owning thousands (or millions) of something. Imagine that you're offered a slice of one pie, or 100 slices of another. The obvious reaction is to take the second option, but what if the first pie is cut into two slices and the second is cut into 1000? This illustrates clearly that two questions should be asked to make the decision: How big are the pies and how many slices are in each? In crypto terms, this is the same as asking what is the market cap and how many shares exist. As we'll hit on in more depth, market cap is the value of the entire asset (how big the pie is), which (for the most part) can't be manipulated, while the number of shares (slices) is totally arbitrary, and set by the developers (bakers) of the particular cryptocurrency (pie).
Less shares of a good crypto > more shares of a bad one
Logical Fallacy #2: Lower Price == Higher Upside
Many people set out on their crypto journeys looking for the highest risk/highest reward coins they can find. They have $20 to invest, so they don't mind losing it, but are up to take the chance that they'll win big. They're often drawn to cryptos that have low prices, thinking they have more room to go up. But as we learned in the last paragraph, number of shares is arbitrary, which means that price is arbitrary as well. This is illustrated more clearly with the following equation.
This means that price alone doesn't give any insight into market cap (value), which is a much more effective (though far from perfect) metric to analyze risk/reward. The best way to determine risk/reward of a particular asset is to do a lot of research to understand the developers, their vision for the product, the size of the market, the competitive landscape, and other external factors (like regulation). Market cap is a good approximation though, because in general, large companies/assets are more proven, so they have a lower likelihood of failure, but they've also already captured a large percentage of their potential market, so their upside is smaller as a percentage.
Lower market cap ~= higher risk/reward
So What?
If what I'm saying is true, there's a massive inefficiency (read opportunity) created by millions of dollars worth of illogical buying. What would be the most clever, sinister way to take advantage of these massive inefficiencies if you were a greedy crypto genius? It would be to create a cryptocurrency (it doesn't even have to do anything), divide it into a TON of shares so that the price is really low, then market it to a bunch of amateur crypto investors, who will buy just to have a ton of shares in something that they fallaciously believe has massive upside. This is exactly what's happened.
The image above shows the top 4 cryptocurrencies in existence sorted by circulating supply (number of shares). For reference, Bitcoin has ~19M shares and Ethereum has ~120M shares. Shiba Inu and Safemoon are giant marketing ploys, with no real value proposition for the world. As is made clear by their name, they are literal jokes made by people who know they can make money, solely by creating an asset with a really low price and marketing it to noobs. I don't know much about BitTorrent, so I won't speak to it, but HEX is a literal (brilliantly executed) scam, which you can read more about here.
Takeaways:
- Price shouldn't impact your decision to buy an asset, instead look at market cap and price changes (as percentages) if you choose not to dig deeper than the basic numbers
- Ask what value a cryptocurrency you're considering adds to the world
- If a crypto you're considering has an astronomical number of shares (>1T), consider it a red flag