Week 23 Day 6: Altcoins and Crypto Tokens: 99% Will Go to Zero

For every Bitcoin, there are thousands of altcoins (alternative cryptocurrencies) -- Ethereum, Solana, Dogecoin, Shiba Inu, and thousands of tokens most people have never heard of. Many were created to solve real problems. Most were created to make their founders rich. Of the top 20 cryptocurrencies from 2017, only a handful are still relevant. The majority lost 90-99% of their value.

The altcoin landscape: Ethereum (ETH): the second largest crypto, the platform for decentralized applications and smart contracts. Has a plausible long-term use case but competes with newer, faster blockchains. Solana, Avalanche, Cardano: 'Ethereum killers' that offer faster transactions. Each has a developer community but faces the challenge of displacing Ethereum's network effect. Stablecoins (USDC, USDT): pegged to the dollar, used for crypto trading and remittances. Useful tools but not investments. Everything else: speculative tokens, memecoins (Dogecoin started as a joke), DeFi tokens, NFT-related tokens, and thousands of outright scams. CoinGecko tracks 13,000+ tokens. Most have negligible market caps and zero liquidity. The historical attrition rate is brutal: of the top 100 tokens by market cap in 2017, over 70 have lost more than 90% of their value versus Bitcoin. If you want crypto exposure, Bitcoin alone is the most defensible choice. If you want broader crypto exposure, allocate no more than 1-2% of your portfolio and accept that it is essentially a venture capital bet with a high probability of loss.

The altcoin market exhibits extreme power law distribution. Makarov and Schoar (2020) documented that Bitcoin and Ethereum represent 60-70% of total crypto market cap, with thousands of tokens splitting the remainder. The survivorship bias in crypto is severe: we remember the tokens that 100x'd but forget the thousands that went to zero. The median return of all crypto tokens launched since 2014 is approximately -90% (based on CoinMarketCap data for delisted and inactive tokens). Cong, He, and Li (2021) modeled crypto token pricing and found that most token prices are driven by speculative momentum and network effects rather than fundamental utility. The 'fundamental value' of most tokens (based on the discounted fee income they generate) is a small fraction of their market price, implying large speculative premia. For portfolio construction, the principal-agent problem in altcoin investing is acute: token founders and early investors hold large pre-mine allocations, insider selling is difficult to detect, and 'rug pulls' (developers abandoning projects after collecting investment) are common. The SEC's aggressive stance on classifying many tokens as securities (Howey Test application) has added regulatory risk. The conclusion is straightforward: if you want crypto, Bitcoin is the 'blue chip.' Ethereum has a secondary case based on its smart contract platform and developer ecosystem. Everything else requires a venture capital mindset -- high conviction, extreme position sizing discipline, and willingness to lose 100% of the investment.