Why and how should we invest for the future?
Industry Overview and Trends
The crypto market has grown to be a trillion business if we look at the market cap. But how big is it actually? Let’s compare it with other macro-asset and monetary markets.
When we observe from a macro scope, the crypto market is still such a little baby. It is so frustrating and exciting when I stare at the picture above. Yes, it is small, but with huge potentials. As an OG in the crypto industry, I feel obligated to support and facilitate the growth of crypto innovations.
Trend 1: Bitcoin dominance keeps going down and will go down even further.
During 2013 and 2016, Bitcoin dominance was trending down slightly from near 95% to 80%. Due to flooded token offerings in 2017, Bitcoin dominance went south sharply to 35%. Meanwhile, Ethereum dominance jumped to 30%. There was a chance of flippening at that time. But that was a turbulent time with “forked Bitcoins”. Since 2018, we have never seen Bitcoin dominance firmly standing above 70%. If you ask me why, I would say that’s because of profound development on public chain ecosystems and genuine innovations of DeFi applications. I predict that Bitcoin dominance will go down further to the level of 20–30% in the future. A lower Bitcoin dominance will benefit the industry in multiple ways. For example, we may say goodbye to the “doomed” 4 year cycle of bull-bear run, which is mostly driven by Bitcoin’s halving mechanism. Solid applications with unique fundamentals will perform independently, decoupled from “大饼” (a nick name of Bitcoin in Chinese). If that comes true, there will be golden years for crypto VCs.
Trend 2: Stock listing is expected to become the main line of investment in the coming years.
On April 14th, Coinbase was listed on Nasdaq. Bitcoin reached the peak on that same day. Coinbase’s listing indicates that equity investment is feasible in the crypto market. Not all startups need to issue tokens to raise money. A16z has raised 2.2 billion USD for a single fund, along with dozens of crypto VCs raising hundreds of millions. What have stopped traditional investors from investing in the crypto market is gone. I see a huge wave of traditional venture capitals coming in the next 2 years. Another model is emerging as well. Imagine a combined investment model of “equity+token”. Chia is on an accelerated timeline to IPO, which could be a hint of this new model.
Trend 3: Institutions will continue to be the engine for a bull run.
Two days after the picture above was published it was already out of date, with Citi joining the party. I have been following up ETF applications in the US as well.
What TradFi institutions and ETFs will offer is more established infrastructure for mass adoption. 2020 was just the starter. The greater institutional wave is gearing up.
Trend 4: We are going to embrace compliance.
If we want the crypto industry to grow in an even larger scale, we have to embrace compliance. The recent Chinese regulation storm has quick impacts on the crypto ecosystem in the local market. Some of the top CEXs have been warned by regulators across the world and ceased fiat gateways. It is inevitable to face regulators if the market grows to a larger scale.
Trend 5: Assets are at the core of the market.
Top exchanges are exploring and building exclusive ecosystems covering the full-life cycle of high quality assets. Crypto investors need to think about what they can offer. What is your edge? Incubation, listing, or asset circulation?
Investment Strategies
Strategy 1: Infrastructure
As I mentioned, equity investment is trending in the crypto market. Many startups will become bluechips in the coming years. For equity investors, they need to think about the macro picture of the crypto market. Find the key lanes. Find the key players. Find the best teams.
Strategy 2: Crypto-native Ecosystems
Public chains offer the fundamental infrastructure for innovations. Middle layers like oracle itself could also evolve to an ecosystem of chains and applications. Other circles shown above like DeFi, NFT, and gaming have their own local ecosystems as well. Mapping out. Find the ecosystems with “living people”.
I would like to mention a bit about Uniswap. From my perspective, Uniswap is not just a single DeFi application. There is a chance for an entire trading ecosystem based on Uniswap. Curve V2 follows the same idea of having everything done for the users/traders. But Uniswap purely focuses on liquidity building and self-driven oracle, which is very fundamental for a decentralized trading ecosystem.
Strategy 3: Key Innovations
The picture above illustrates my basic understanding about key innovations in the crypto market. It is very difficult to find the key innovations if you don’t have a blueprint or a roadmap in your mind already. Yes, a blueprint may not be 100% accurate. A roadmap could misguide you. So, you have to be updated with new trends. Then, digest and develop new paradigms. Finally, be confident and prepared of what will come true.
Final Thoughts
I would like to quote the famous paragraph of Charles Dickens’ novel, A Tale of Two Cities:
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”
Pessimistic people are often right. But optimistic people are often successful.
Data Sources:
- Source: Bloomberg, World Gold Council, Bank for International Settlements, coinmarketcap.com, as of April 30th, 2021.
- Source: coinmarketcap.com, as of June 27th, 2021.
- Source: Bloomberg news reporting, as of June 18th, 2021.
- Source: open information collected, as of June 15th, 2021.
This article was written by Kevin Yang.
