Altcoin Trading Surges on Coinbase, Passing Bitcoin and Ethereum Combined

Altcoins are taking off. Should you invest?

Coinbase's fourth quarter results tell us a lot about current trends in crypto. The platform's annual retail trading volume increased over 600% last year, up from $73 billion in 2020 to $535 billion in 2021, reflecting the huge growth in crypto. Plus, it seems as if the popular exchange's strategy to list as many cryptos as possible is paying off.

Last June, Coinbase's CEO Brian Armstrong announced the platform would list as many cryptocurrencies as it legally could. It went on to make a further 95 cryptos available for trading. There are now 159 tradable cryptos on the platform.

Altcoin trading gaining ground on Coinbase

Altcoin trading accounted for 55% of last year's trading volume on Coinbase -- overtaking Bitcoin (BTC) and Ethereum (ETH), which together totalled 45%. This divide was even stronger in the fourth quarter, when other crypto assets represented 68% of the total volume. Indeed, as the year progressed and Coinbase's altcoin listing grew, trading of these other cryptos edged out the market leaders.

2021 trading volumes on Coinbase

It's also worth noting that while altcoin trading has increased, many Coinbase customers still hold Bitcoin and Ethereum. By the end of the year, Bitcoin represented 40% of the assets on Coinbase, and Ethereum made up a further 25%. Other crypto assets accounted for 31%, and the remaining 4% was held in fiat (traditional money). This suggests that long-term investors continue to hold the two crypto kings even as they branch out into altcoin trading.

Should you invest in altcoins?

Altcoins can be an exciting area of crypto investing. Many investors believe these less-established cryptocurrencies offer the potential for higher returns than Bitcoin and Ethereum.

There's some logic to this: In 2021, Bitcoin and Ethereum gained 60% and 400% respectively. These are solid results, but other cryptocurrencies saw gains of over 5,000%. However, the trade-off for higher potential gains is that these cryptocurrencies also carry more risk.

If you're considering investing in altcoins, here are some guidelines that might help:

1. Research each crypto in detail

Investing in altcoins takes time, because you have to do your homework. Cryptocurrencies are a relatively new and unregulated market, so you need to develop your own strategy to weed out dodgy projects.

Never buy on the back of advice from a celebrity or influencer, as every investor's strategy and financial situation is different. Plus, there could be a hidden agenda behind the recommendation. These ideas can be a good starting point, but you need to read the project's whitepaper for yourself. It if doesn't have a whitepaper, this is a definite red flag.

Investigate what problems that crypto says it will solve, and make your own decision about whether its solution has merit. It's also good to check out the management team, the strength of the development community, and how the coins or tokens are allocated.The more research you do, the better equipped you'll be to navigate the altcoin market.

2. Understand the risks

All cryptocurrency trading carries risks, but the smaller the token's market capitalization, the bigger the risk. These cryptos tend to fall faster in market dips, and prices are often even more volatile than Bitcoin. Investors often hope to get in early on promising projects that might generate huge rewards, but there's also a danger these projects will fail.

Follow this golden rule: Only invest money you can afford to lose. That way, if the market crashes or an individual project doesn't deliver, it won't stop your meeting longer-term financial goals.

3. Don't go all-in on altcoins

Given that many altcoins fail, it doesn't make sense to go all-in on a single project -- no matter how exciting it seems. Instead, build a diversified and balanced crypto portfolio. You might, for example, keep a certain percentage in Bitcoin and Ethereum, and allocate the rest to higher-risk, smaller coins. You might also consider a mix of specific sectors, such as smart-contract cryptos or metaverse tokens.

If you're new to altcoins, it's wise to stick to projects that are in the top 50 by market capitalization at first. These usually have higher trading volumes and more liquidity, so you're less likely to get stuck with a coin or token you can't sell.

Bottom line

Coinbase's results show that many investors are branching out into altcoins. However, it's reassuring to see that many still hold a decent chunk of Bitcoin and Ethereum. Before you invest in altcoins, think about how much of your crypto portfolio you want to dedicate to these higher-risk projects. And be prepared to do lots of research to understand each crypto.