Rising Cryptocurrency Acceptance

We are starting to see the floodgates open in "acceptance" of cryptocurrency. Recently, both Dubai and Russia announced that they will create state-backed cryptocurrencies. In addition, we have seen the creation of over 70 hedge funds who design their exposure to track single or baskets of crypto assets. These funds purchase and hold cryptocurrency directly and the value is reflected in the hedge fund’s company. However, the US Government only allows accredited investors, those individuals making more than a couple hundred thousand annually and have a net worth more than one million, to invest in these funds. This growing acceptance by the high-risk sectors of Wall Street gives us a glimpse of the trajectory of cryptocurrencies in the next 6 to 12 months.

Acceptance does not mean Adoption so it is important to understand why there is more of an appetite for cryptocurrency risk than there was only a year ago. In the last couple years the hedge funds industry has met negative returns and historically their returns have been trending down over the past 25 years.

With this information it is not surprising why hedge funds are moving into cryptocurrencies; they need a market with high volatility and manageable liquidity. The cryptocurrency market meets both of these criteria and presents experienced traders a huge opportunity. As a result, this desire to seek higher returns has increased the “acceptance” of cryptocurrency.

Whether this acceptance spills over into the mainstream psyche remains to be seen. I would take this recent trend with optimism and caution. WIth this trend, I am optimistic we will continue to see wealth flow into cryptocurrencies over the next year. Since most hedge funds lock withdrawals from their fund for set periods of time and the focus of the majority of funds is for professional investors to gain exposure to cryptocurrency and not short it, the market can really only go higher in the short term.

So how much higher? The Cryptocurrency market cap is still only $170 Billion which is small compared to accredited investors total wealth. Accredited investors hold $65.3T of the world’s wealth. If accredited investors invest 1% of their wealth that means $653 Billion could flow into cryptocurrencies. This would mean a Bitcoin value (based on today’s Bitcoin market dominance) of over $20,000 per coin. This all assumes a fully liquid Bitcoin market, but the crypto market becomes illiquid at times during high selling or buyer pressure which is one of the reasons for the high volatility.

No one knows for certain how the market will behave, but I am optimistic in the short term. However, after these short term gains are realized I feel we will see a large correction because acceptance does not equal adoption. The hedge funds are increasing speculation and not actual adoption, but at the same time, they will be increasing the liquidity in the cryptocurrency market which may help increase the adoption rate. Keep in mind that most folks are locked into a hedge fund and cannot just remove their funds when they desire. This can create a huge sell-side supply that can build up over time until it starts to be released back on the market. If the market becomes too overvalued by these hedge funds, there will not be enough folks who have adopted cryptocurrencies to absorb the incoming supply. It is important to keep this aspect in mind going forward. DO NOT get sucked into the extremely high returns. Have an exit plan spelled out now so you can think rationally when you need to diversify your portfolio and not PANIC SELL.

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