Looking At Where the Money Can Most Easily Flow… And Getting Head of It
One thing that we should all remember about the crypto world is how much money was previously invested in it, but fled in 2018. There were two big factors to this. First, you had all the fairweather investors who had bought Bitcoin at the behest of their friends liquidating it. At the same time, seeing as Ethereum was the fundraising coin of choice for ICO’s, there was tons of it being sold off at the same time.
The Non-Obvious (But Really Obvious) Investment Thesis
An investing strategy that may make sense on a longer time horizon is thinking about where the money is now, and where it is most likely to move. This sounds fundamental and simple, but using the logic from the above information, you can form several investment theses, or strengthen existing ones.
The simple view is that Bitcoin and Ethereum are both notable routes into the crypto investing world and should be where you put the majority of your money. This is likely what many of you are doing, but what if we take it further?
There are other sources of investment from within the industry. You can think of all the stablecoin holdings, like Tether or TrueUSD, as cash equivalents that are waiting for their time to strike. These investors believe in crypto, but know we are currently going through somewhat of a down period. This leaves $2 to $3 billion available for investment in the near future.
Two strategies emerge here. First, you can buy up trading pairs with these stablecoins, so when they do sell, your investments increase in price. But a longer-term bet would be buying stablecoins as we reach a full boom in the next market. These investors had the right idea in taking some money off the table, but keeping it close at hand for quick investing.
More Sources of Capital
Another source of future crypto funding is the cash holdings being held in crypto exchanges. Even though these funds haven’t been invested yet, these are clearly users who want to buy crypto. It’s not like these users are keeping cash in a crypto exchange for the interest rate! The information as to which exchanges hold how much cash on behalf of users isn’t readily available, but you can benefit from a future shift in sentiments by purchasing some of the smaller-cap coins on large exchanges. Bitcoin and Ethereum will obviously benefit when there is a swing, but coins like Stellar or Bitcoin Cash which are listed on Coinbase yet are not the obvious bets will surely outperform the altcoins that are less accessible due to only being listed on smaller exchanges.
There’s also the cash holdings of crypto hedge funds. Just like the fiat in crypto exchanges, this money is effectively “in crypto” even if it hasn’t been used to purchase it yet. When all is said and done, these numbers total approximately $6 billion and show the huge potential inflow that may occur in the near future. And this excludes all talk of institutional money, which is another factor altogether. Getting ahead of this money and being ready for when it is injected back into the crypto world will likely yield huge returns. Many are bullish on Bitcoin, but lack short-term justification. This is just one reason why it makes sense to be long on the crypto world.
Heavy Extrapolation into the Future
And if you want to get really optimistic, you can start analyzing the “fiat amplifier”. This is the amount an influx of fiat changes the overall market capitalization of a coin. For example, when $2 billion was pushed into Bitcoin in 2017, the result was an increase in Bitcoin’s market capitalization from $15 billion to $250 billion. This number is not a hard science, but if you think of $6 billion ready at the side, and an increase in the overall market capitalization by a multiple of that $6 billion, the effects can be staggering. All of these numbers (and the multiplier) are estimates rather than exact numbers. However, the idea is sound and a lot can be done with it.
The overall point is that there is an insane amount of upside potential available. Anyone shorting Bitcoin only stands to gain a small amount (~$4,000, assuming they wait until it goes to 0). But anyone buying now has what appears to be some strong tailwinds behind them. Even investment advisors are starting to come around to the idea that Bitcoin is not dead and the crypto space will likely have a comeback. In a world where the yearly lows are continuing to increase, asymmetric bets like this are going to become more and more valuable.
Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.