The Changing Landscape of Crypto Investing
As the various structural risks of crypto investing change over time, the opportunities for returns change as well. This concept can be compared to the first law of thermodynamics, which states that energy can neither be created nor destroyed, only transformed. In the world of investing, risk and return undergo a similar transformation throughout an investing cycle.
Key Points:
- In the early days of bitcoin, the main risk was existential, as it was uncertain whether bitcoin would survive or not. However, as the market became more confident in its longevity, the value of bitcoin rose, providing new investors with a new price equilibrium.
- Another significant risk was financial/funding risk, which questioned whether enough capital would be mobilized to support the growth of the crypto asset class. This risk was mitigated by significant inflows of venture capital, leading to another price increase.
- The next major risk on the horizon is regulatory risk. Although progress may be slow, it is expected that crypto will navigate through this risk and usher in the next transformation.
- While risks still exist, the reduction of each risk opens up opportunities for outsized returns. However, as each risk falls, the potential returns become smaller incrementally.
- The transformation of the crypto landscape due to the reduction of risks is paving the way for increased financialization and institutional adoption. This creates an “allocator’s dilemma,” where investing with the largest funds may not guarantee success.
In conclusion, the changing landscape of crypto investing presents both challenges and opportunities for investors. As the thermodynamics of crypto investing continue to evolve, astute institutional investors should carefully consider their stake in this moment of transition.
Hot Take
The reduction of risks in the crypto market is creating a unique opportunity for smaller funds to outperform larger ones. However, this window of opportunity may not last forever as the landscape continues to transform. Therefore, it is crucial for institutional investors to make informed decisions and take advantage of this moment.
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