/ Ecosystem

Meet the New Investors!

Hodor

Hodor

I blog about Ripple & XRP. FULL DISCLOSURE: All views are my own. I do not work for Ripple; I am not a professional financial analyst, and the majority of my crypto holdings are XRP.

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Many people are discovering crypto-currency in 2017.

When the year started, the combined market capitalization of the entire crypto-currency market was listed at 17.7 billion dollars. 1 If you plot the growth of the entire crypto-currency industry on a standard chart, you end up with a graphic depiction of one of the fastest-growing sectors in economic history:

Crypto Market Capitalization Growth in 2017 Crypto Market Capitalization Growth in 2017 ($ billions)

This diagram reveals that the entire crypto market has already grown 620 percent in eight months. 2

Keep in mind that even though the rate of growth is impressive, it's reflective of industry adoption whose momentum has been obstructed by difficult technical barriers to entry for the "common investor."  It's not easy getting your fiat money converted into the crypto universe; and even after you've accomplished that, it's a learning process to determine which exchanges you're going to use to purchase your preferred currency, and how to safely store your investment.

Retail investors are starting to catch on.

Wanting to participate in a growing industry whose rate of return has been measured in thousands of percent for the leading crypto choices, some traditional sources of capital are starting to take notice.  While the investment funds that were comprised of "early adopters" posted eye-popping returns, other funds are heeding this early trend.  A recent article revealed that upwards of 70 hedge funds are planning on adding some of the top crypto-currency choices to their portfolios. 3

We can expect a lot of newcomers in the crypto investor community, and they're not going to be like the current group of crypto owners.  The current group are primarily comprised of early adopters and recent risk-taking converts.  The current group has been studied in terms of its demographic makeup: 4

cryptocurrency_demographics

From the above survey results, it's apparent that the crypto industry's current group of investors is heavily skewed towards younger males.  In addition, most of those younger males responding are likely to be in technology; this demographic is all about to change.

We are about to see an enormous influx of investment.

The secret is out, and it's getting a lot of press; crypto is the up-and-coming technical market that has yet to achieve its full potential.  The collective attention of many fund managers and ordinary traders is squarely on crypto-currency.  As a result of this attention, we can expect to see massive waves of investment.  While some celebrities have been claiming that Bitcoin and its like are in a bubble, the numbers don't support this.  Here is a bubble chart that depicts the current size of the crypto market compared to the size of the dotcom bubble at the height of its valuations: 5

bubbles_2

While it's not desirable to repeat the mistakes of bubble investing, the graphic serves the purpose of demonstrating that the investor reach and interest in crypto-currency has not peaked; in fact, I would expect the ultimate size of any bubble in crypto-currency to be much larger given its global reach compared to the relative focus of the Dotcom bubble in primarily western stock markets.

What does it mean for XRP?

To answer what investing behavior and choices we can expect of this additional capital flowing into crypto, and its affect on XRP valuation, we have to examine it from two different perspectives: the retail investor and the fund manager.

Retail Investors

We're already familiar with the demographics of the current crypto-currency investment community; but the makeup of our new set of retail investors are anything but what we've already seen.  They will be comprised of a much more diverse constituency and will include groups that are currently under-represented in crypto investing: Women, retirees, hobby investors, stock market day traders, and traditional ForEx traders.

It's always perilous to make generalizations about demographic groups.  Even so, indulge me a moment and think about how the new group might be different from the current group based on age bracket alone:

  • More demanding from an end-user perspective - i.e. higher standards for graphical user interfaces. 6
  • Less technically proficient than the "early adopters" of crypto 7 (Note that this doesn't seem to be true of older tech workers,8 but only for the older general population)
  • Greater financial resources per new investor 9
  • More trusting of mainstream media 10
  • Higher percentage usage of mainstream investing services (i.e., retail investment companies like JP Morgan) 11
  • More risk-averse 12
You may be starting to draw some conclusions already about the different makeup of the group that is about to adopt crypto; just make a mental note about these generalizations for now - and whether you agree or disagree with them.

Fund Managers

Fund managers respond to investor interest while at the same time trying to satiate their investors' expectations for the focus and goal of the fund.  Each one of these asset portfolio managers will act differently according to the type of fund being managed. 13

Arbitrage Funds try to exploit price differences between markets.  I expect to see more of these types of funds, given myriad examples of price differences for the same crypto-currency on different exchanges and in specific countries. 14

Arbitrage fund managers will target those markets with the highest differences by exchange or geographic region in an effort to capitalize on these differences.  While it might seem like arbitrage fund managers might not be concerned about the actual asset, they must also look at the true underlying value of what they're trading.  To effectively execute arbitrage strategies, sometimes these fund managers must hold a pool of the underlying asset.

This means that in addition to market inefficiencies, they must consider the inherent strength of the asset they are holding and trading from a long-term perspective if they plan on maintaining any significant reserves.

Value Funds look for undervalued assets. 15 This requires the greatest amount of research and evaluation.  To truly identify growth opportunities, value fund managers will conduct scenario analysis and deeply evaluate an offering's strengths, weaknesses, opportunities and threats.  (SWOT analysis)

While value fund managers do use technical analysis as one of their tools, they also balance it with careful consideration of an asset's business value and its probability of dramatically increasing to a more appropriate price reflection by the market.

Bruno Mars

When you think of value funds, it's the same concept as a music producer discovering a young singer that has the vocal capabilities of Sia or Bruno Mars.

 

Growth Funds are just the opposite of value funds. 16 They follow the maxim "the crowd is not wrong."  They pile onto already-identified winners and continue the momentum.  The equivalent in stock investing would be buying more Google or Apple stock.  Those two are already recognized as industry leaders and have already led the pack multiple times in terms of valuation.

By buying more of it, the growth fund manager is betting that further price appreciation is still possible.

The growth fund manager still must conduct a SWOT analysis, but technical analysis is also very important at quickly identifying when a stoppage of further growth has occurred.

Hybrids are sub-categories of growth funds or value funds.

One type of hybrid fund is the index fund. It usually has a representative sample of a specific market.

The fund managers for index funds will need to identify their "representative sample" based on factors such as volume and market capitalization. 17 Index funds are attractive to investors who are betting that an entire industry will appreciate in value. 

Even within the category of index funds, there are different flavors.  One popular type of fund is one that invests by country. 18 19

Evaluation of Crypto Investments Through a New Lens

lens

Now that we know who the new investors are in crypto for the foreseeable future, what kind of evaluation will this new group do when considering their investment portfolio?

Many of the funds that have expressed interest in adding crypto to their existing portfolio have indicated that they will be focusing on the "top five" or "top ten" by market capitalization.  If retail investors also follow this pattern, we can expect both groups to do a considerable amount of comparative analysis among the top choices.  One recognized tool in stock comparisons is to use a checklist. 20

A standard checklist for evaluation of the underlying crypto-currency would look something like this:

  • Market Capitalization
  • Payment Settlement Speed
  • Transaction Cost
  • Transactions Per Second
  • Distribution
  • Stability
  • Years in Existence
  • Number of Accounts
  • Transaction Validation Approach
  • ILP Enabled (or Plugin Exists)
  • Number of Exchanges
  • Governance Model (code changes)
  • Governance Model (ecosystem)
  • Organization Type
  • Country of Organization Registration
  • Number of Developers / Employees
  • Business Model to Fund Development
  • Liquidity of Network
  • Business Plans of Organization
  • Existing Market Adoption
  • Market Momentum
  • Media Coverage
The above list is based on my own list of considerations when I was first researching crypto-currencies in 2013.  While Bitcoin was first, I knew it was not the best from a technological standpoint.

However, in addition to the technology of the idea or solution, its necessary to take many real-world considerations into account as well, as we've seen from Bitcoin's dominance from 2009 through today.  Do not underestimate the last three business factors in this checklist.

Fund managers will definitely be doing this analysis, and since they're controlling assets at a much greater level than a normal stakeholder, they will conduct a much more thorough evaluation.

Retail investors that are interested in identifying long-term investments will also be doing this analysis, as will short-term and day traders looking for a safe landing area with their liquidity between riskier trades.  For myself, the journey that lead me to XRP started with a comparison, and continued with outcomes from scenario analysis.

Scenario Analysis

Bad things happen in crypto.

For Bitcoin, it seems that one of their weakest points has been code governance.  The developers, business associations, and the miner consortiums that comprise the Bitcoin ecosystem do not seem to agree on much 21 lately, and as a result, we now have Bitcoin Cash and Bitcoin.  The entire summer of 2017 exhibited muted price movement, or even declines in some cases, for the top ten choices; the entire market suffered because of bad press coverage of Bitcoin governance.

I bring this up as an example because I don't want readers to miss that Ripple is on its seventieth version. 22 When Ripple architects create an update to improve the network, there is no conflict and fork; instead there is only anticipation for new features!

While comparative analysis with an organized checklist can reveal much, each investor or fund manager should also chart out different business scenarios and their associated probabilities, along with some assumptions around what each would do to the price of the crypto-currency.

The New Investors Will Discover XRP

I challenge you to create your own checklist as well, even if you're a more diversified investor than myself; this technique should reveal much to you about your choices, and may even reveal some new investment candidates for you.

If I'm correct, you will find out for yourself why XRP is going to be a very strong choice for the new investors.

For me, the journey was arduous when I dove into each crypto-currency and attempted to rate them according to objective criteria.  When I did this, it revealed one with the stark contrast I was looking for; Some of the new retail investors and fund managers will be so overwhelmed by XRP's qualifications that they might ask "what's the catch?"

And the wonderful answer for them?  There is no catch. xrp_symbol4

Sources:

  1. https://coinmarketcap.com/historical/20170101/
  2. https://coinmarketcap.com/historical/
  3. https://cointelegraph.com/news/hedge-funds-tied-to-cryptocurrencies-exploding-over-70-in-pipeline
  4. https://twitter.com/lukapusic/status/883711327100862465
  5. https://coinmarketcap.com/
  6. https://www.uxmatters.com/mt/archives/2013/10/designing-user-interfaces-for-older-adults-myth-busters.php
  7. http://www.pewinternet.org/2014/04/03/older-adults-and-technology-use/
  8. http://www.techrepublic.com/article/myth-busted-older-workers-are-just-as-tech-savvy-as-younger-ones-says-new-survey/
  9. http://www.investopedia.com/articles/personal-finance/011216/average-retirement-savings-age-2016.asp
  10. https://www.americanpressinstitute.org/publications/reports/survey-research/generations-trust/
  11. http://www.businessinsider.com/why-so-few-millennials-invest-in-the-stock-market-2016-7
  12. https://afcpe.org/assets/pdf/vol824.pdf
  13. http://www.investopedia.com/articles/professionals/110315/how-mutual-fund-managers-pick-stocks.asp
  14. https://www.luno.com/blog/en/post/bitcoin-price-different-different-countries
  15. http://www.investopedia.com/terms/v/valuefund.asp
  16. https://www.fidelity.com/learning-center/trading-investing/trading/value-investing-vs-growth-investing
  17. https://en.wikipedia.org/wiki/Index_fund
  18. https://www.cnbc.com/2013/12/12/explode.html
  19. http://www.investopedia.com/ask/answers/122414/what-country-etf.asp
  20. http://www.investopedia.com/articles/stocks/07/peer-comparison.asp
  21. https://www.forbes.com/sites/laurashin/2017/03/21/is-this-massive-power-struggle-about-to-blow-up-bitcoin/#4e661b9a7325
  22. https://github.com/ripple/rippled

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Hodor

Hodor

I blog about Ripple & XRP. FULL DISCLOSURE: All views are my own. I do not work for Ripple; I am not a professional financial analyst, and the majority of my crypto holdings are XRP.

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