Every crypto bull run in the past has demonstrated a rotation of capital across various crypto assets. Typically, money moves from stablecoins to Bitcoin, then to Ethereum and other large layer1 protocols, and then into various mid and low market cap altcoins. However, this was true in a crypto market lead by individual retailers (the degens), their behaviors have been of those who want to get rich quick and expect a lamborghini after investing $500 into crazy meme coins. The coming bull run will see a new player with very large pockets coming to the market, the institutional investors that think very differently. What is to expect, is the capital rotation in the crypto market will not behave the usual way that was previously the standard. SEC-compliant crypto-assets are likely to outperform others.
Institutional investors have previously not participated in the crypto industry, however with both Bitcoin and Ethereum ETF on the verge to be approved by the SEC, we will see an entirely new crowd of players in the industry, and what was commonly accepted in regards to capital rotation will unlikely hold true.
Retail Investors & Capital Rotation
The crypto industry has attracted degenerate investors (degens), typically looking for 1000% return per month. At every layer of the capital rotation, billions of dollars of buying pressure can move bitcoin to grow 500% for example, but capital gains obtained from the growth of Bitcoin, would then flow to Ethereum which has a 3rd of the market cap of Bitcoin, and push the price up 1000% instead. From there capital gains on ETH growth would then get spread into mid cap and low cap crypto projects, where insane returns would often occur due to their highly volatile nature and small pool of capital available on liquidity pools on decentralized exchanges and market makers supporting trading on centralized exchanges. It was common to see 10,000% growth in such new token and low cap crypto-assets.
This rotation occurs for two primary reasons: 1) as the Bitcoin investors decide that a decline is about to happen, and they chose to cash in some of their profits and re-invest in lower size projects that have yet to grow significantly, 2) investors realize they won’t get rich fast enough with bitcoin, and they chose to seek alternative highly risky investments, as well they got a taste with the gateway drug that is Bitcoin, and now wants to diversify their capital while they feel invincible.
Either way, the capital rotation has occurred for at least the last two crypto bull runs, and most analysts still expect to occur in the coming bull run of 2024 and 2025.
Institutional Investors Mindset
With the looming crypto ETFs about to be approved, institutional investors are likely to invest some major capital into the market, and since at the moment only Bitcoin and Ethereum are expected to become full blown ETF, then that money will flow into these two assets. I would expect Solana to be filed as well for an ETF soon, but other assets are much less probable to become an ETFs, as such, institutional investors will be able to invest in these ETF’s, but won’t be able to rotate their capital into the rest of the crypto industry. The reason being that institutional investors behave differently, they have a fiduciary duty to protect the capital of their investors, and they need to follow certain rules. For example, asset managers can allocate without asking permission higher up the food chain for assets that are directly available on brokerage platforms, but they can’t allocate without permission onto other assets even if they want to. For this reason, the ETF’s and their availability on brokerage platforms make them very easily traded by these asset managers that want exposure to the crypto industry.
The effect of this, is that the mid-cap and low-cap crypto assets may not perform as well as they used to be in comparison, which may lead investors to realize that investing in BTC/ETH is providing better returns than rotating their capital into the mid-cap market, in turn starving capital from flowing onto low-cap and entirely new tokens. We often see this on the traditional stock market, the high cap magnificent sevens (Apple, Microsoft, Nvidia, etc) have been growing faster than lower cap tech stocks as more and more money concentrates into the top winners until a massive collapse occurs. After all, investors seek the best returns for their investments, and if Bitcoin/Ethereum starts to offer a sustained 20%-30% growth month over month, then why sell to re-allocate into the mid-cap market? After all, returns for more high risks investments need to provide higher returns, but with a very large capital allocation that is stuck and forced to stay in ETF’s and SEC-compliant crypto assets, returns may be skewed comparatively to a market only traded by the retail investors.
Given that the high cap crypto market has leverage opportunities, while new crypto assets and lower cap do not have such access, I would argue it is entirely possible to generate more returns by simply sticking to BTC/ETH/SOL this time around.
SEC compliant crypto assets
Since institutional investors can only invest into SEC compliant assets, and require easy access on brokerage firms with their usual tools such as leverage, derivatives, options, etc… then the ETF’s is the real choice. We can expect a new slew of crypto assets that seek to go full compliance to gain access to these deep pockets. These lower cap SEC compliant assets should benefit from massive growth potential which we have never experienced before, simply because there won’t be many of these on the market, and concentration of capital is likely to flow to them. Asset managers may not be able to allocate capital into these until they reach a size where they become available on brokerage platforms, but we may see innovative investment groups supporting these assets to get them listed. So, an entirely new narrative is likely to emerge, but may take another bull run cycle (2028–2029) to fully materialize.
There are two major players in the crypto industry in this coming bull run, one of which was not participating in the previous bull run, which are the institutional investors with very large amounts of capital to deploy and very sophisticated investment strategies. The retail/degens investors are simply ill-equipped to compete this time around, and the standard capital rotation is likely to be disrupted, which is a great opportunity by itself. While, this is by no means investment advice, I personally believe that the degens will cash in profits from capital gains as Bitcoin and Ethereum sky rocket, and deploy that capital into mid-and-low cap crypto-assets only to realize that they underperform what they can achieve by sticking to BTC/ETH/SOL and will then proceed to go back into these three, which will drive yet another massive pump and concentration of capital onto very few assets. Meanwhile, the pump and dumps of lower cap may not experience the craziness that typically happens with 10,000%+ gains, and the pumps might be short-lived and dry up fast while capital moves back. All of this will be a higher benefit to institutional investors that will milk the less sophisticated investors.
Lastly, if newly created crypto ventures manage to get full compliance with the SEC to launch low cap assets, and they can manage for easy access by institutional investors, they should experience explosive growth potential given the lack of competition (we may just see a handful of those in the upcoming bull run but should become a narrative in the longer term). Imagine the usual growth we often seen in newly created crypto projects growing 100,000% within a year in a bull run, that’s with thousands of competing projects receiving capital as well, in this case, we can expect very little competition being registered and approved by the SEC, making the entire market valuing these vastly more than their non-SEC compliant counterparts.
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