Why Are Cheap Cryptocurrencies Booming?

The Rise of Cheap Cryptocurrencies

We have seen unprecedented rises in the cryptocurrency market as a whole the last few days. More specifically, cryptocurrency coins with a lower cost per coin in the top 20 have seen greater gains than the rest of the market. Ripple (XRP), Cardano (ADA), NEM (XEM), Stellar (XLM), and TRON (TRX) have all seen monumental gains this last week (12/28/17 - 1/4/18). XRP has increased from $1.43 to $3.59 (151% increase), ADA has gone from $.39 to $1.17 (200% increase), XEM went from $.9 to $1.74 (93% increase), XLM went from $.21 to $.80 (281% increase), and TRX has gone from $.03 to $.19 (533% increase). All of these coins are now in the top 10 for highest market cap on coinmarketcap.com. Most of these prodigious jumps have come in the latter half of the week, post New Year’s. While other coins in the top 10 such as Bitcoin and Ethereum have also realized gains after the holidays, they haven’t increased nearly as fast and as significantly as the aforementioned coins (Bitcoin has increased by a meekly 3.5% and Ethereum by 40%). What has caused cheap cryptos to rise past their more expensive counterparts?

Emotional Investing

These 5 coins all share the commonality of currently being under $4 each (however maybe not for very long). XRP is the most expensive currently at $3.59 while TRX is the cheapest at $.19. Since these coins are not similar to fiat coins in the sense that they can be divided and exchanged accordingly, why would the seemingly irrelevant price per coin matter? To a rational thinker, the price per coin shouldn’t matter. Factors such as the use cases of the coin, the developers/team behind the coin, the volume and market cap of the coin are examples of significant factors that a logical thinker would consider much more important than the price per coin. So then why have these select coins that all have low prices per coin flourished recently? The answer is simple: most humans do not invest rationally. Ideally someone would invest completely independent of their emotions and biases however this is rarely the case. Our emotions and biases get in the way of rational and logical behavior. Rational behavior in the case of cryptocurrencies simply means that you invest in a way that you believe will maximize your net benefits based on research and facts. However, in reality people rarely are able to shut off their emotions and biases and make decisions without at least consciously or subconsciously consulting their subjective side.

Human Behavior Towards Low Price Coins

Consider the following question: which is more appealing, acquiring 10,000 of crypto coin A or .01 of crypto coin B. The logical thinker would ask what the values of the coins are before answering. If coin A is worth $.0002 and coin b is worth $200, then acquiring 10,000 of coin A would equal $2, while .01 of coin B would also equal $2. Therefore the logical thinker is indifferent to acquiring 10,000 of coin A or .01 of coin B, both increase the wealth of the individual equally. However, people rarely act purely rationally and logically even with their finances where rational behavior is consistently the most rewarded. The bias that is repeatedly emphasizing itself in the crypto markets is that people prefer having larger amounts of whole coins than fractions of a coin. It is much more satisfying to tell someone who knows nothing about cryptocurrencies that you own 1,000 TRX than telling them you own .3 BTC, even though the .3 BTC is currently worth much more. It is also more satisfying to look at your virtual wallet and see you have 100,000 of a coin rather than .001. You may be thinking that you or other crypto investors you know would never behave this way and never invest solely on the price per coin at any given time. You also may be completely right in this assumption. However, we would not expect crypto veterans to behave this way, this behavior and the recent surge of cheap cryptos might be more indicative of a wave of new, inexperienced investors entering the market.

New Year New Investors

The majority of the surges in the aforementioned coins occurred after the holiday season. During the holidays, people get together with their families, celebrate, and most importantly have discussions (one potential topic could have been the rapidly growing cryptocurrency market). After the holidays, some of the temporary financial burden that goes along with the holidays is relieved. This can free up funds for individuals to invest, save, or spend the money on something other than gifts . It’s a perfect time to invest for individuals who received money or have become recently relieved of temporary financial strain. Cryptocurrencies and their rapid growth have been all over the mainstream news and there has likely been a great increase in interest and discussion as a result. These are some factors that could potentially explain the rapid increase in the cryptocurrency market cap over the last week ($566 billion to $770 billion). Certainly part of the market cap increase is from veteran investors and business as usual activity. But the recent growth has to be partly attributed to the increase in news coverage of cryptocurrencies and the time of the year. Both of these factors lead to new investors entering the market and could be behind the cheap crypto rise. The significance of new investors is that they have a lack of knowledge regarding the market and as a result are less likely to invest rationally.

New Investors Behave Illogically

With this wave of new investors entering the market, we have seen cheap cryptocurrencies in the top 20 thrive. The majority of new investors do not have the experience or the knowledge to invest intelligently and rationally. Newcomers are likely trying to get in on the massive growth that cryptocurrencies have experienced in 2017 and hope it will continue throughout 2018. Since most new investors do not know how to properly research and judge different cryptocurrencies, they invest based on easily accessible information that they can understand (some jargon such as smart contracts, PoS/PoW, or even hodl is likely to confuse new investors). Some of the most readily available information to them is the price of a coin and the rank in terms of market cap. With the lack of knowledge a new investor faces, they evidently invest by letting irrational behavior overtake them through their emotions (fear of missing out on the cryptocurrency boom) or with their biases (buying more of a cheap coin over a expensive coin purely based on price). One may wonder why all cheap cryptos haven’t seen the same gain as the 5 previously mentioned cryptos. This may be due to the fact that people are more trusting of cryptos with a higher market cap as they are more popular and have more money invested in them. However, investing in a coin because other people are also doing it is another irrational behavior that is common with new investors. While many of the coins with the highest market caps are deservedly above others, investing solely on the rank of a coins market cap is not rational.

To Conclude

Traditional economic theory would have us believe that people behave rationally in order to maximize their own net benefits. This idea has been recently challenged through the emerging field of behavioral economics which aims to combine psychology and economics in order to better understand human behavior. Leading behavioral economists such as Richard Thaler (2017 Nobel Prize in Economics) claim that humans often act irrationally in terms of maximizing their own well being. This phenomenon is exemplified in the youthful cryptocurrency market. New investors are entering the growing market at an increasing rate and are adding to the extreme volatility of the market. The recent growth of the top ranked, cheap cryptocurrencies can be partially attributed to the influx of new investors and their irrational investment behavior. This is by no means a claim that these cryptocurrencies are poor investments, rather an attempt to outline part of why this extraordinary growth has taken place over the last few days. Instead of telling new or potential investors what cryptocurrencies they should be investing in, the community needs to highlight the importance of individual research and responsibility. A more rational cryptocurrency market will enable the rational investor to benefit from logical decision making to an even greater extent.

I appreciate you taking the time to read my article and I truly hope you have a marvelous day!

• Shane McCabe

Sources
https://coinmarketcap.com/
"Misbehaving" by Richard Thaler (strongly recommend you read this book if you are interested in economics, psychology, market behavior, etc.)

Side Note
This is my first article posted to Steemit. I plan on posting a few articles a week. I would love to read some feedback or constructive criticism about my work, whether you loved it or if you felt physical pain while reading it. I would love to discuss any questions or comments you have so please leave a comment!

Disclaimer: This is purely my opinion. Do not consider this investment advice. I'm invested in multiple cryptocurrencies so please be aware that I may be biased even if it's unintentional. I strongly encourage you to do your own research from multiple sources and to come to your own conclusions.