This article is an exclusive contribution to CoinDesk's 2017 in Review opinion series.
A few weeks back, I spoke to 1,000 fund managers, bankers and private equity folks in New York at the inaugural Consensus: Invest conference organized by CoinDesk.
What to told them is that I don't come from Wall Street, and I'm not a formally trained analyst. My background comes from the world of emerging tech and startups, hence my view and analysis tend to be outside the box.
This is a brief overview of some of the work I presented there, including my view of where the crypto asset markets are at in Q4 2017.
If you're new to the market, there's a lot to learn. Understanding cryptocurrencies is akin to learning about an alien species. Even our markets do not correlate to any other traditional asset class. (I published this "3 cats and a moon" fractal pattern that reliably traded for three years, and it ceased to work after publication).
This leads to the first point: the bitcoin market is changing and actively changes frequently.
What we're seeing now appears to be a trend that began in Q4 2017 with the decision by U.S. regulators not to approve a bitcoin ETF. The publicity from the ETF buildup described bitcoin as a legitimate asset instead of the "drug money" rhetoric.
My theory is that Wall Street investor interest mounted during this phase and the money that was denied an opportunity to enter via a regulated ETF, came in anyway directly through the exchange markets around March.
We saw an uptick in price when it should have dropped lower according to existing models. Additionally, we saw bitcoin's long-term declining volatility trend break upwards as large volumes of money started trading the swings.
Bitcoin's price chart as of Q4 2017 started carving a new fractal pattern. Fractals reflect the market's psychological profile. By my reckoning, a new animal had arrived.
The price chart was now determined by a hybrid of traditional bitcoin traders and early Wall Street trader money.
Marching toward M2
But new traders are entering a market with a not insignificant history.
Attempts have already been made to attempt to value cryptocurrency networks, taking inspiration from other trading tools. NVT Ratio is another invention of mine. This works like bitcoin's PE Ratio, indicating when BTC price has outstripped fundamental value.
Like PE Ratio in equities, fast-growth companies exhibit higher ratios, similarly, bitcoin exhibited higher NVT Ratio values in its early high-growth phase.
But, you may be asking, growth to what? The answer is becoming a significant part of the global money supply. In 2017, all the crypto asset markets combined equal half a percent of the world's M2 money supply, and we are at approximately 1 percent of the world's population as users. This is an equivalent adoption level as 1996 for the internet.
Bitcoin users double every 12 months in our current phase of the adoption S-curve. This was calculated with my work tracking Google Trends data on the assumption that users search BTC/USD price.
If this trend continues, we are nine years away from half the world using bitcoin.
That might seem like a lot to take in, but it's supported by data.
Here’s another view of bitcoin's growth on a long-term chart where each altitude climb is a 10x increase. Though bitcoin's share of the 0.5% seems small, but we are actually 66% of the way on our journey to usurp M1 money.
Let me reiterate something that sounds radical – bitcoin is four years out from exceeding the world reserve currency’s M1 supply.
If volatility continues it's on its 9-year downward trend, we should also see bitcoin price stability near fiat FOREX levels. This means grandma can have a USD savings account earning 1 percent per year, or she can have a BTC savings account earning 1 percent per week at similar risk profiles.
Thinking in trillions
So let me zoom out a bit and talk about where we are in the 10,000-year view.
In 2013, they called bitcoin drug money. In 2017, they called it a bubble. It’s not in a bubble. We're on the path of digitizing the world. We are seeing the final phase of the Post-Industrial Revolution which started in the 1960s-1990s with the invention of the microprocessor through to the expansion of the internet.
Bitcoin is not just money. It’s the invention of an internet-native digital scarcity. And with that breakthrough, software will eat the financial world.
Blockchain assets will be bigger than the approximately $70 trillion in money, there’s another $80 trillion in equities, and I’m told well over $200 trillion in real estate. This will all be digitized.
"Stealth," "awareness," "mania," and "blow-off" are the stages of the investment cycle.
With Bitcoin only the geek money invested in the stealth phase. Smart money was displaced to the "awareness phase."
Normally institutional money arrives during the awareness phase, but due to regulatory bars institutions were not allowed to enter. Hence we are now seeing institutional money arrive late competing with retail money in the early mania phase.
It's my belief this could create a super bull season right now in Q4 2017 and into 2018.
The new frontier
But bitcoin's maturity is also likely to push newer investors toward higher yields, and as expected, we have seen bitcoin itself losing its dominance over the last five years.
This is a sign of the markets starting to mature. A fully digital economy should not be 95 percent money. All industries will eventually fill this economy.
That last slide was the top 125 outliers, this chart shows essentially the entire market, with the darker colors moving to lighter represent the top 200, 400, 600, etc.
Newer coins are outperforming older coins in general. Also buying the entire market tends to be neutral in performance.
In this environment, selection and filtering is key. I suggest selecting just as a venture capitalist would. Vet the team, call them up, are they competent? Check their tech, read their source code, is the tech stack useful? How big can the market grow to? What are the token dynamics, is the token designed for high velocity or low?
Successful projects will follow what I call the "Falcon 9 launch trajectory."
The goal is to ride the early steep trajectory for two to three years, then roll the investment into new projects capable of climbing steeply. It's a venture capital model. Returns that bitcoin offered in 2011-2013 are still available today, but today there’s more work involved to find the gems.
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