Ups, Downs, and the Big Crypto World

January 28, 2021

It’s been another interesting month so far in the world of crypto so let’s jump right in.

Ups and Downs

Bitcoin raced up to near $42K only to retreat to approximately $32K at the time of this writing. It tested the $30k support level twice and held. Yes, it’s still volatile, but that’s ok.  This is standard operating practice for the reserve asset, and general consensus is that this is just a resting point and significant growth is well on the horizon.

Indeed, many wealth gurus, such as Chamath Palihapitiya and Raoul Pal are predicting much higher highs over the coming years.  Raoul even went out on a limb and stated why he thinks bitcoin can reach $1M by 2026.  While that may seem outlandish, let’s just focus on the near term and the generally accepted (and some now think conservative) target of $100K by the end of 2021.  Importantly, whether $100K or $1M over time, both cases are supported by the stock-to-flow model (you can find a refresher on stock to flow here when I wrote about it last April) which predicts significant appreciation over the coming decade.

Of course, such incredible highs would require significant adoption, however we’re well on our way.  MicroStrategy, which now holds over $1B in bitcoin (yes, billion), and Square, who moved a conservative $50M into bitcoin, set the precedent for others. Recently, Cathie Wood of Ark Capital stated that she believed that many other fortune 500 companies would follow and allocate portions of their corporate treasuries to bitcoin.  It also helps that the world’s largest asset manager, BlackRock, has also stated they are getting into the world of crypto.  These are big players, folks, and would create demand that is unprecedented.

So, it’s important to keep in mind that volatility is nothing new – during the last bull run in 2018, when bitcoin surged from approximately $2K to a high of $20K, there were seven corrections of approximately 40%.  Seven. Seven. I recommend zooming way out and looking at timelines with a wide angle lens.  Keep the big picture in mind.

It’s a Great Big Crypto World

While the world has been focused on bitcoin, ether, has quietly surged to a new all-time high of $1,470. Simultaneously, the overall market cap of the crypto-verse has been inching ever closer to $1 Trillion.  So, what’s happening here?

Ether, the token of the Ethereum network is not simply drafting on the coat tails of bitcoin.  Remember, it’s a different crypto asset class, a smart contract platform asset, and is becoming the goto for the world of decentralized finance (DeFi).  DeFi is best unpacked more fully in another blog however, in summary, DeFi services are financial services such as loans or interest-producing products that run on a blockchain.  What’s important here is that Ethereum has a stranglehold on DeFi, hosting 204 of the ~216 DeFi apps currently in production.

This promotes a couple of different phenomena which are driving value, namely composability and network effects.  Composability is a design principle that allows individual components – in this case distinct DeFi protocols– to be combined and/or collaborate in different ways to create new offerings (think of Legos).  This is possible and facilitated because they are all built on the Ethereum blockchain., for example, is a growing DeFi marketplace.  It can grow and expand its offering and select the best and new component partners, be it Compound, Curve, or any other DeFi protocol that complements and provides value to the users.  This creates naturally leads to more users.  More users create more utility and greater demand and the network then grows in value. This leads us to the concept of network effects: the more users a thing has, the more valuable and defensible it is to competition.

We believe DeFi is one of the next great areas of growth in this bull run.  The growth of DeFi itself is impressive, however it also increases the utility and value of Ethereum, which then engenders more apps are built on it, etc. A virtuous cycle.  You get the picture.  So, it is composability and network effects in a large part that are driving Ethereum’s growth, and we believe it’s certainly worth watching.

In Closing

Bitcoin is the big guy and it gets the spotlight. Certainly it has earned it and we believe there is significant growth in store.  But let’s not forget the contenders, the up and comers, and the other value that’s being created in the world of crypto assets.  These are the foundational elements that will shape our tomorrow.  It’s happening now, and we believe it’s important to have exposure to this entire universe.

That’s it for this update so, until next time, be well, stay safe, and we’ll continue to Decrypt: Crypto for you!

Warm Regards,

James Diorio

Chief Executive Officer

TRADECRAFT Capital | 500 W 2nd Street #1900, Austin, TX 78701

About the author James Diorio

James is a Principal and Chief Executive Officer of Tradecraft Capital.