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The crypto divide
Each sector of the crypto industry is characterized by different value drivers.
We’ve gone from “everything is cryptocurrency” to “actually, there are currencies, cool protocols, DeFi applications, distributed computing platforms, NFT, markets to make money…”
Smart investors are increasingly paying attention to the actual usage and underlying microeconomics of various networks and building their trading ideas around unique growth drivers. It’s still a meme market, but how many memes reflect, dare I say, the fundamentals of the project?
This is a very important area of development. This is where private equity funds will have a huge competitive advantage over their generalist competitors.
What keeps the entry threshold into crypto investing high is a major information asymmetry in the “reporting” standards of the protocols, the complexity of technical training, and the limited risk management infrastructure (how employees deal with compliance, enforcement and accounting issues in some of these new structures).
As of today, crypto funds are experiencing the best times of their lives. A dynamic that is likely to continue into the new year.
For large money managers, the risk curve continues to rise in the face of negative interest rates, so most of them simply can no longer afford to ignore the crypto industry.
When new money enters crypto, it tends to flow in two directions-inward and downward. But not outward in any way. Capital may flow downward in search of a higher beta, but going up, it doesn’t leave the ecosystem except for taxes. On the contrary, it settles into BTC, ETH, SOL, or other blue-chip cryptocurrencies.
How high can we grow?
The fall we are all waiting for may not be as severe as in past cycles, but what about the remaining growth?
Even with the favorable conditions we discussed above, don’t you think the price is a little overpriced right now?
Isn’t the $30 billion capitalization of SHIB or the NFT ads in Times Square embarrassing?
Here are the signals of the highs we’re waiting for. Let’s start with bitcoin.
Bitcoin
It is a cash asset with no profit, so its price is value-driven, which means it is almost always priced similarly to gold.
But Bitcoin also has its own “fundamentals,” which are also worth tracking!
One example might be the ratio of market value to realized value.
This is the ratio of Bitcoin’s “free float” market capitalization (coins that have moved in the last five years) to its “realized value,” which is the total market value of each BTC at the time it last moved on the blockchain.
The market cap can remain unchanged, but the realized value can rise sharply and vice versa.
● The first is the value of Bitcoin multiplied by the amount in circulation.
● The second is a dynamic metric that accounts for the movement in the equation.
Unless you are a walker and willing to tolerate four-year bear markets, whenever MVRV reaches 3, it is usually a good time to lock in a profit. (You have to ape if the MVRV falls below 1).
As I can see from the chart, the time spent above 3 is gradually decreasing.
● In 2011, MVRV stayed above 3 for four months.
●In 2013 for ten weeks.
● In 2017, three weeks.
● In early 2021, just three days.
If history repeats itself, how much is that in dollars?
If we hit 3 again this year, it will be a range of $100,000 to $125,000. Not bad!
If things take a crazy turn, the next target for BTC will be the market capitalization of gold.
At current prices, parity with gold would give us BTC at $500,000. So, the potential is to make 10 X even at current prices.
That said, it’s still lower relative to Bitcoin’s historical returns.
This, of course, is only possible if the ceiling does not disappear completely, which would mean the collapse of the fiat financial system and that 1 BTC = 1 BTC.
Ethereum
Lately again, you hear a lot of talk about “flipping” from the ardent bulls of ETH.
Could ETH overtake BTC in this cycle?
I doubt it. Not with its constant scaling issues, tier 1 competitors, and the willingness of infrastructure companies and application developers to accept the likelihood of a future with multiblock chain.
I still think it would be more interesting to look at the issue in terms of collective flip-flopping by Tier 1 platforms, similar to how FAMGA’s capitalization exceeded M1.
And if we take a broader view? Can Ether outperform Microsoft, Apple or Google?
It would need to grow by a factor of 3–5.
And if you beat all of them together?
Then it’s already 15–20 times growth, which seems like a difficult task, even considering that the current 5% of FAMGA’s market capitalization for ETH seems like a trifle.
Solana and others:
A new project in the crypto industry, which claims to be the 3rd largest crypto market capitalization.
What about Polkadot and Avalanche then?
If the idea is that alternative first layers have a beta higher than Ether and are destined to take away market share from Ethereum, it begs the question:
What about Terra, Polygon, Algorand, or Cosmos?
These relative-value buys come down to business development primacy (app distribution) and recruiting primacy (whether you can get developers to work on non Ether).
All of these “Ethereum killers” have the money to compete aggressively, but you, as an investor, either find winners or buy the basket (short Ethereum’s dominance as a tier one layer).
Either way, these assets are tied to ETH.
DeFi
Despite DeFi’s gigantic growth in 2020, DeFi is still less than 1% of the market capitalization of global banks, which clearly demonstrates how much growth potential there is in the long run.
Prices for some of DeFi’s leading protocols have gone sideways, but if you are convinced that crypto capital markets will displace centralized institutions faster and faster, this is probably one of the best risk/reward ideas in the market today.
But, keep in mind that competition between protocols is fierce, regulation is coming, there are a lot of technical vulnerabilities, system defaults can hurt the whole market, and high gas fees hurt the unit economy.
By many metrics (price to sales and price to earnings ratio), DeFi is still in the lead, but the math is now on the whale’s side.
NFT
Given the fact that they are not interchangeable and illiquid, it is very difficult to estimate the market capitalization of the NFT sector.
In early September, DappRadar estimated the capitalization of NFT at $14 billion, but since then the figure has risen markedly.
Considering the size of the design space that NFT opens up to the entire crypto user economy, the scale of this segment is frighteningly large in the long run.
Meltem talks about LVMH ($375 billion?), and Su Ju thinks it’s more likely to see NFT’s market capitalization at 10% of crypto.
I don’t think they’re wrong, but it’s more about the opportunities for NFT creators and infrastructure developers than it is about the investment appeal of most specific NFT projects.
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