Skepticism, Not Magical Thinking, Should Be Your North Star for Avalanche
InvestorPlace - Stock Market News, Stock Advice & Trading Tips Before you take the plunge with Avalanche, you should consider how its risk-reward narrative has shifted over the past year....
Despite the blunt implications of the headline to this article, I do not dislike Avalanche (CCC:AVAX-USD) per say. Indeed, the introduction of the AVAX coin confirms that the blockchain industry is rapidly gaining momentum and credibility.
But with way more cryptocurrencies than there are stocks across U.S. exchanges, your guiding star should be skepticism.
For one thing, I would be highly skeptical about anyone pumping Avalanche or the countless other alternative cryptos or altcoins available in the decentralized investment market.
With more than 12,000 cryptos to choose from, this sector has the makings of the 2000 tech bubble. Back then, seemingly everyone and their dog was launching an initial public offering. But of course, such extreme exuberance cannot be sustained indefinitely.
It’s an important lesson to consider before buying Avalanche or a similar coin or token. The tech bubble wasn’t just about ridiculous valuations though that was a significant component.
Rather, it was the delusional thought process that believable narratives could largely carry a company to success.
According to CNN Business, at the time the tech bubble finally burst, “80% of companies doing IPOs had no profits.”
It was the Pareto principle come to life: 80% of the actual earnings came from only 20% of the companies. Supposedly, this circumstance isn’t exactly a problem until 80% of the retail money chases those less-than-substantive organizations.
Over the past few weeks, I’ve admittedly been pensive about cryptos, even though I’m a long-term supporter. I don’t think that’s necessarily a contradiction, though. I’m a big fan of sports cars — that doesn’t mean I’m going to buy one that’s well overvalued.
It’s the same idea here. Perhaps if the market wasn’t so crazy, I’d be much more enthusiastic about Avalanche. But when everybody’s betting on the same horse of decentralization, the reward won’t be that great.
Avalanche Was Once a Smart Wager
I’ll use a baseball analogy to better illustrate my concerns about overenthusiasm toward Avalanche and hyped-up cryptos. Currently, Las Vegas bookies have assigned -5,000 odds for Los Angeles Angels phenom Shohei Ohtani to win the American League MVP award. His next closest rival is Vlad Guerrero, Jr., an absolutely devastating power hitter for the Toronto Blue Jays.
Guerrero’s odds are +1,200, which surely means that Ohtani is more than likely going to win the AL MVP. However, there’s a difference between rooting for Ohtani (I am) and betting on him (I am not).
Personally, I don’t know anything about sports betting so I wouldn’t place a wager anyway, but someone who wants to bet on Ohtani must really have a compelling reason to do so. Based on how money lines work, “favorites are expected to win, you assume more risk when betting on them.”
I feel the same way about Avalanche as I do with every other “in” altcoin. They may have been great investment ideas back when nobody was talking about them in the same way that people early on bet on Ohtani following his injury-plagued 2020 season.
Once Ohtani became the modern-day Babe Ruth, it was easy to bet on him narrative-wise, but the money line’s risk-reward profile also shifted to accommodate this valuation spike.
Several folks might counter that Avalanche has fundamental value, which brings me to my point about magical thinking. Yes, I understand that Avalanche is a better mousetrap in that it challenges Ethereum (CCC:ETH-USD) in terms of transaction output and scalability.
But so what? Ethereum offers greater credibility thanks to its extensive track record. Also, just because an alternative exists doesn’t necessarily mean it’s a good one.
Is El Salvador Better Off?
Typically, the argument goes that anyone with an internet connection can transaction in cryptos. Also, transaction fees are cheaper than using traditional banking channels.
I used to fall into this line of thought but then I had to really assess my Ron Paul-ian assumptions. Yes, traditional wire transfers are expensive and banking itself requires a modicum of personal financial stability because there is a price for governmental protection.
If you transact exclusively in crazy crypto land, you do so entirely at your own risk. That’s why everything’s cheap but it doesn’t necessarily mean it’s a good deal.
You can make the argument that if you’re poor, you do need the government’s backing because if something goes wrong, you don’t have the same resources as the wealthy to overcome the negative circumstance.
But we’ll eventually see if Avalanche and its ilk have the substance to deliver. As you know, El Salvador recently made Bitcoin legal tender. If decentralization is truly a superior alternative to social and economic equity, in a year from now, we should see some measurable improvement in the lives of its citizenry.
Something tells me though that El Salvador will still be the El Salvador we know today. And that would bring a lot of the magical thinking involved with cryptos under serious doubt.
On the date of publication, Josh Enomoto held a LONG position in ETH and BTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
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