Japan thinks alts are Pokemon. They want to collect them all!
I don't blame them... They buy any shit and see it rise, and buy and see it rise higher, and....
This goes to our lesson today, for those who don't already know: Free-Float and liquidity.
Free-Float: "Free float is a term in stocks trading. It describes the proportion of shares of a publicly traded company that is traded in the stock market. Note that not all free float shares may be actively circulating on the market at any given time as many traders purchase shares as a long-term investment."
Liquidity: "In the market, liquidity has a slightly different meaning, although still tied to how easily assets, in this case shares of stock, can be converted to cash. The market for a stock is said to be liquid if the shares can be rapidly sold and the act of selling has little impact on the stock's price."
So what do these two terms have to do with recent boom of the altcoins?
Let's just take Ripple as an excellent example of this... Ripple has one of lowest free float of all cryptocurrencies. That means that even if there is a gigantic numbers of coins (38 billions!) almost all of them are in the hands of the issuers/partners.
Only a minuscule amount of that 38 billion coins are in the exchanges for trade. How many XRP's do you or people you know have? Exactly... not much, if any. Yet the market cap has risen from around 200 million to around 5 billion now. That is an impressive 25x price increase in a couple of months!
How is that possible then? Well, as I said, only a very small of those 38 billion coins are being traded. So the price keeps rising while there is more people demanding that "scarce" coins that the issuer is offering to the market.
But, I can hear you: a 25x price increase? Fuck that, I am doing BIG money on it! Who cares about that free-float thingy?
Well, you should care, because that's where Liquidity comes to give you a reality lesson. As soon as the demand is higher than the offer, price can keep rising, but when that happens and more people want to sell, the ridiculous small free-float turns into a gigantic volatility that can easily undo most of the artificial and unrealistic high price. Not to mention what would happen if the issuer decides to sell some additional chunk on the market causing an epic dump.... but they won't probably do, cause that would be pointless considering the low liquidity.
This is where Bitcoin differs from most altcoins because:
1) The free-float, after all this years maturing in the market, is orders of magnitude bigger. And the only "scarcity" that there might be is NOT artificial, as it comes from LONG TERM investors. That is healthy.
2) The liquidity is also orders of magnitude higher. As this long journey has taken good care of most weak hands and short time holders.
Market cap means nothing unless we are comparing assets with similar free-float and liquidity.
In the short term you can profit greatly in altcoins, but in the long term everything comes back to an equilibrium point.
So yes, you could perfectly create a PokemonCoin tomorrow and fool everyone into believing its the next big thing.... until people want its money back and the castle crumbles.
* Not all altcoins are the same. There are also some fundamentals behind, and also some coins whose free-float is not that bad, but none compares to Bitcoin. Also, it is very possible to make some big bucks trading altcoins, even the shittiest PokemonCoin... but you can lose it equally fast. It's your game.
