Never Underestimate the Power of the Irrational Investor

I recently had someone ask me whether or not I thought it was a good idea to invest in a specific coin that had seen a 20% rise in it's market price. In trying to explain to them why I thought that it wasn't too late to get into that specific coin, it occurred to me that one could probably invest in just about anything in the cryptosphere and come out OK if you have the patience to sit and wait.

After all, even now the levels of price action that we're seeing are completely irrational, right? As a case in point, consider that over the last 24 hours people have spent nearly three quarters of a million dollars on SegWit2X futures. AFTER the hard fork has been cancelled. I suppose they're speculating that some rogue miner or group of miners will revive the fork and make it happen anyway? And then in addition they're speculating that the price of a B2X token will go above $300 despite very low adoption rates?

Consider that over the next six months to a year, there will be millions upon millions of additional people entering the cryptosphere with the idea of investing in cryptocurrency and making a huge return. A large number of those people will have little to no experience at investing in ANYTHING, much less something as volatile and intangible as a cryptocurrency. They will have heard stories of people making 1000x returns in a few weeks and they will take their hard earned cash, inject it into the market on something cheap, and hope for the best.

A good example of this might be something like Cardano. They see it on the coinmarketcap.com website in 17th place and that it's available currently for about 2.5 cents. A new investor might even take the time to look at the website, where they will see a nice flashy presentation that uses words like, "decentralized public blockchain... smart contract platform... global collective of expert engineers and researchers..." They might decide that throwing $100 at it is a good bet. Any they might be right. Heck, just last month it was worth nearly twice what it is today. After all, Cardano would only have to go to $25 in order to multiply their investment by 1000, which makes their bank account worth a cool $100,000 in the end. There are lots and lots of cryptocurrencies out there that are worth more than $25, right?

What they never stop to think about (or maybe don't even understand) is that at $25 per coin the total market cap of Cardano would end up being 777.8 TRILLION dollars. The likelihood of that ever happening is basically zero. However, that won't stop a whole lot of irrational investors from putting $100 of their money into Cardano tokens with dreams of huge returns. In the process, the price of Cardano will rise, and long before there is ever any demonstrable use case that could justify a rise in the market cap the price will go up and a rational investor can pull out a nifty 30% gain.

This isn't just idle thought. As I write this, something called Unitus (UIS) is up by 75% for reasons unknown.

If you want the ultimate in irrationality, just look at Bitcoin. $6,598 for a single piece of digital currency. It doesn't represent anything but a concept, and if you talk to any programmer or cryptographer worth their salt they'll tell you that Bitcoin is the old dinosaur in the room. It offers significantly less functionality and usability than, say, Dash. Or Monero. Or LiteCoin. Or Steem. Or hell, probably Unitus. It's outdated, clunky, slow, and expensive to use. It's fairly transparent and offers no real privacy protection. Despite this fact, within the last 24 hours a total of $3,500,000,000 has been spent by irrational investors who are buying BTC, because there are plenty of other irrational investors out there who have already demonstrated that Bitcoin CAN be worth more than today's price. They're probably even making a relatively sound investment in the short term.

So should you buy that coin that's currently worth $0.002? How about the one that's $0.02?... $0.20?... $2.00?

The answer is probably yes, if you're willing to wait long enough for enough other irrational investors to come along and pump the price high enough that you can make a smooth 30% gain. Just remember to put in stop losses and set price triggers that will automatically sell your holdings at your specified profit target. In the end, the power of the irrational investor will likely make every single cryptocurrency currently in existence pump by at least 30% at least one time in the next year.

Where else are you going to see returns like that?