The Search For 100x Low Cap Gems

The Blockchain Sector @ 2023-07-19

James Bachini

Jul 19

Fund manager Peter Lynch, author of One Up On Wall Street, proliferated the term “10 bagger” in the context of a stock with potential 10x returns.

The Magellan Fund manager *averaged a 29.2% annual return outperforming the SP500 by more than 2x*

In the context of crypto every project, including Bitcoin has the potential but not guarantee of 10x returns over a long term timeframe. Where I have had the most success and what has enabled me to consistently outperform the returns of Bitcoin and Ethereum alone is finding the 100x potential projects.

A 100x project refers to an investment opportunity that has tenacity to increase by 100 times its original value. It's every investor's dream to spot such projects early, especially in the blockchain sector where innovation is regularly pioneering immense value generation.

The portfolio impact of these returns is seismic and in my opinion researching low cap gems is where the most opportunity is in crypto markets

You could invest a pre-set amount in a new project every day for a year and you might only need to find one 100x to be profitable because you’ll find plenty of 2x, 3x, 10x along the way.

If you have even the slightest amount of technical knowledge in the space you should be able to find one out of 365 projects throughout the course of a year that goes on to become a success. It’s those projects which gain momentum, traction and TVL which in turn attracts future investors and high returns.

The Catch With Gem Hunting

The problem with this strategy is that there aren’t 365 good new projects per year to invest in. In bear markets there is no funding or interest from users which makes it unappealing to launch new projects for devs. In bull markets there are more project launches but valuations and market cycle risk is too high for savvy investors.

The effectiveness of low cap gem hunting hinges on the prevailing market cycle. The ideal situation is an emerging new sub-sector or narrative in a bear market, and finding a market leader in that niche earlier than the majority of market participants.

Low cap altcoins carry a higher beta to the majors (BTC & ETH), meaning they are more volatile assets. In a bull market they can double overnight and in a bear market they get absolutely crushed. You don’t want to be holding low cap altcoins at the top of a market cycle no matter how strong the project is.

Unfortunately our human psychology works against us and most investors move up the risk curve during a bull market. Things we invest in go up in value, friends make fortunes and greater risk is rewarded with greater profits. This reinforces our “risk on” attitude with every dopamine filled win… until the market falls off a cliff and we notice an overexposure to things we have no real conviction in holding.

Why Diversify Low Cap Projects

With the potential returns being astronomical, investing in low cap projects might sound like the perfect strategy. However, it brings astronomical risk due to its inherent volatility and uncertainties.

Most startups fail across all sectors, most crypto projects never gain traction, finding an elusive 100x crypto startup isn't easy and investors can and will likely face losses along the way.

Adopting a robust risk management approach is crucial, investing in projects with longevity and diversification is key. Spreading an allocation of funds over an array of carefully chosen projects helps protect against unexpected adverse movement in any single project but it doesn’t protect against a complete market downturn.

Incorporating a low cap strategy as a small part of a larger portfolio, rather than gambling everything on one project is the only way to preserve wealth. If you are ape in to a $100 position for fun that’s fine, if you are managing a significant amount of your net worth then avoiding losses becomes more important than chasing gains.

Timing The Sale

The final challenge is to time the sale of an asset. A 100x project doesn’t return 100x unless you sell it at the opportune time. Here are some strategies which might be useful to help time the sale of altcoins.

Fundamental Analysis
One of the most effective strategies I’ve found to time the sale of altcoins is by focusing on the projects fundamentals. This includes the overall health, TVL and potential growth of the user base. The competence, transparency and cooperation of the team, the potential for future narratives and news within the project and externally beneficial to it. If there is sign of a decrease in the project's momentum, or it starts underperforming relative to competitors it might be time to think about an exit.
Technical Analysis
Another strategy involves the use of technical analysis, which utilizes historical data, primarily price and volume, to predict market trends. This can be useful, but not a crystal ball, for both individual altcoins and for the crypto market in general as a reflection of Bitcoin price action. The most useful indicator I’ve found is a moving average which is set just beyond the area of support and regular volatility. This works similarly to a trailing stop loss where you exit on the first significant downturn. It’s worth noting that there are always two markets for each altcoin, the USD/Token pair and the ETH/Token pair. Both charts have an impact and should be considered when considering TA strength and weakness.
Targets Levels
Setting predetermined profit targets can protect your gains and standardise your results. Once the price reaches a specified target, you sell a portion of your holdings. This approach is especially useful during euphoric bull runs, where it's tempting to become overconfident and greedy. One way to set predefined sell levels is to setup concentrated liquidity positions on Uniswap V3. Bare in mind that you need to exit the position before price moves back through the range. Some investors will sell off half their holdings when price doubles so they return their original stake and free roll the rest, I don’t personally like this but appreciate the psychological benefits that may help hold the remaining position for longer.
Rebalancing
I did this a lot in the last cycle and worked hard on getting my order execution as efficient as possible to make regular rebalancing (daily) cost effective. The idea is if altcoins go up relative to your BTC/ETH holdings you sell a bit back to the majors, if price goes down you buy some more Altcoins to keep your allocations in line with targets. This automates the process of buying low and selling high but it also means you sell off your best assets as price outperforms the rest of the market.

Investing in low cap blockchain projects is a strategy that requires time, research, patience and diligent risk management. When successfully executed it can expand an investment portfolio to create generational wealth.

Find projects with strong potential early and be vigilant about market cycles and risk management.

Where are these low cap gems? It’s all in the research.