Over the last 20 months, the U.S. money supply (M2) has skyrocketed by 40% because our currency was printed into existence unlike at any other time in our history.
During the same time frame, a lot of citizens were locked down across the globe with little to do and had generally high savings accounts.
This catalyzed crypto adoption (digital assets and applications) over the last year-and-a-half in a big way.
Out of lemons, lemonade is being made in the burgeoning crypto industry, with retail speculation and user participation moving the industry along quite nicely.
Interestingly, there is a crypto index that is like the S&P 500 that tracks the digital asset space. The crypto index was created by Soloacti and it tracks the top 200 cryptos, weighted by market capitalization.
The CMC Crypto 200 index launched on January 1st, 2019, and the index weights and rebalances the positions just like the S&P 500.
For example, when a crypto asset drops off the top 200 list because it was overtaken by another crypto by market size, the CMC Crypto 200 rebalances and reweights for the new entry. This ensures the index is always positioned in the most relevant and (theoretically) sustaining investments.
Some interesting insights can be gleaned from the index from a portfolio allocation point of view.
The following is a price graph of the Crypto 200 index since its 2019 debut:
As COVID-19 took hold, we can see that the prices and the total market capitalization of the crypto industry exploded shortly after the Fed reignited the reflation trade and as the stay-at-home catalysts took hold.
As of this writing, Bitcoin comprises a 41% weight in the CMC 200 index and Ethereum about a 20% weight, which are both inflationary-protected assets that especially benefit when the money printers go “brrrr.”
Beyond the inflation trade, crypto unquestionably started to gain wider participation after COVID-19 because users were more willing to experiment with new technologies and applications, especially since they had more idle time on their hands and extra spending money.
During this wider adoption phase, some sectors saw short periods of rapid growth, such as DeFi (decentralized finance) and meme coins.
However, it has been non-fungible tokens (NFTs), the metaverse, and the GameFi boom that have stolen the show, creating all sorts of dynamics in the crypto market.
Never wanting to be left out, speculators rotated in and out of each sector and chased new crypto assets as self-described “degens.”
In crypto, years of change are occurring in days as these emergent technologies get off the ground, and there will be a lot of wreckage in the fast lane because it is still very much the Wild West.
For example, out of the top 10 altcoins (every coin that isn’t Bitcoin) that held high promise when the CMC 200 index was first launched just two years ago, only one remains today after the early hype: Ethereum.
Retail traders, most of which have little bearing on the fundamentals, are playing dangerous games as they chase in and out of blockchains that have little to no value accruing to them.
There is proof.
Despite the parabolic move in many of the more speculative/hot sectors in 2021, like GameFi, most of which would have been captured in the CMC 200 index, a 50-50 portfolio weighting between the only two “fat protocols” that exist (Bitcoin and Ethereum) would have absolutely crushed the broad CMC 200 index since its 2019 inception.
This outperformance has beaten the index by an annualized difference of 88% since January 2019—or a staggering 700% total 2-year outperformance.
As the chief portfolio strategist at FMT, my goal is to get our serious money across the finish line, which is why a “core” crypto allocation –a roughly 50-50 split between the two most globally secure and decentralized settlement networks that offer ubiquity and true longevity —is a smart starting point for allocation.
Just like in the past, there will be dozens of altcoins, many of which reside in the top CMC 200, that will ultimately collapse in price in due time (and thus the index likely continues to underperform our 50-50 core weighting).
Why is this?
In a bear market and as liquidity dries up, we will see who has been swimming naked as the tide rolls out again. There are just too many cryptos, out of 1,000s, that don’t qualify as anything other than bad speculations.
There are only two primary long-term drivers of value for crypto assets. Either the asset is a base-layer protocol (with sound tokenomics), where the native coin’s value is derived by the size of its ecosystem and its network of users (base layer as money) or the crypto asset generates revenues and accrues real value.
That’s it. Those are the only two long-term drivers of value: the former being a tangible book value-like ratio and the latter an equity-like discount model.
Few retail traders are investing with little, if any, fundamental long-term analysis today, given there are 15,000 crypto projects and most will never accrue any value. Most are going to get wrecked when liquidity drains; it does ebb and flow.
Of course, there are other digital assets beyond the fat protocols of Bitcoin and Ethereum that will have sustaining values and enormous investment merit to them that will accrue substantial value over time.
The areas ripe for research and that will merit further allocation in FMT’s view are semi-fat protocols (layer-2 scaling solutions for the fat protocol of Ethereum for example) and user-friendly blockchain applications for a Web3-centric world.
As for the semi-fat protocols and user-friendly applications (think decentralized social media apps or decentralized trading apps), there is plenty of time to take stakes for outsized returns. It is still very much in the Wild West days, and FMT is sticking to what regulators won’t regulate out of business for now.
If you feel like you want to be more enterprising than our “50-50 core,” please feel free to call or discuss.
FMT knows the crypto industry inside and out from a high level and with great insider collaborations. I would be happy to discuss.