Before we get into it, if you are expecting yet another article about the HOTTEST token project – you’re on the wrong blog! Time to look at different investment strategies in crypto currencies.
Yes, I do have a few token projects in my crypto currencies portfolio, of course (I will share more about this in another article). But the reason why I decided to step into crypto is more fundamental than that and it covers the entire ecosystem needed to make crypto currencies even possible in the first place.
Did you know, for example, that you can invest into crypto currencies without having to buy a single one of them? (How does this even make any sense?)
Hang in there, it’ll all become clear in a second. Let’s get into it.
Disclaimer – this article is by no means a recommendation. I am sharing my views and opinion on a very volatile and unpredictable market. References to price levels or past buy/sell orders are not financial advice and solely based on my research.
Fundamentals To Invest In The World of Crypto Currencies
Before we explore investment strategies in crypto stuff, it’s time for a quick 101.
It’s gonna sound cliché AF, but let’s start with the most known crypto currency – Bitcoin.
Bitcoin is nothing other than a new payment method that removes the need for “the middleman”. Who is the middleman? A central organization that approves your transactions, holds your money, has insight in what you do with your money and most of all controls its value. I am obviously talking about the broad banking system.
In the normal system, you hold your money in a bank account. Imagine you want to transfer me €10, what do you do? Nowadays, you open your bank app, type the amount, select my contact details, hit send and voilá – money is transferred.
But there’s some magic happening between you hitting send and me receiving the money. This magic box that allows you to send me money involves a number of parties, which I got to know and study very closely in my work as a consultant in the financial technology sector, but at the core it, we have the banks.
Our banks have 100% insight in our transactions. And if we go one step higher, the central bank has 100% control on the value and amount of money present in the market.
Yes, I know, I cut a bunch of corners, but in its essence, our current system is CENTRALIZED (let’s start getting into some terminology here). In a centralized system, there is one party, or a selected few, who act as trusted party in a transaction.
Generally speaking, the blockchain technology is an alternative to centralized systems. In the particular case of money transfers, Bitcoin is the alternative to the centralized banking system as we know it now.
How does it work? And where do the coins come in the picture?
Time to talk about a very important player in the Bitcoin network: the miner. And not just one, 200.000+ of them, creating the Bitcoin network.
The miners are the ones approving your Bitcoin transactions. The Bitcoin network (protocol) is built such that a given number of transactions is coded in a block for the miners to approve.
When a miner approves a block, it receives a reward… in Bitcoins!
And that’s the ONLY mechanism to issue new Bitcoins for a total of 21 million.
This reward is programmed to half every set number of blocks. For Bitcoins, it comes down to one halving event every 4 years. The last one was in 2020 and it brought down the reward to 6.25 BTC for every approved block of transactions. Given the increase in valuation of the past years, this has been a massive investment strategy from the miners’ perspective.
*Quick Note Before We Move On*
Since your transactions are approved by (most likely) different miners within the network, no one party holds 100% of your data. The transactions are anonymously registered in the Bitcoin network history (through wallet ID only) which makes it impossible to derive individual patterns without knowing someone’s wallet ID. By scanning the network, however, one can derive global trends which are still valuable and do not infringe any data protection law we’ve ever thought of as humans.
Bottom line: you are in charge of your own data. This is the essence of the DECENTRALIZED system. And this is not just for payments; you can apply this line of thinking in a lot more industries.
Crypto Currencites’ Halving Events
The reward system built in the Bitcoin network protocol is a CRUCIAL point for the sustainability of the miners’ business model. At this moment, the miners are earning rewards and a transaction fee. As I explained, the rewards will get lower and lower (since they drop 50% every year), which means that to sustain their operations the transaction fee is likely to raise. This mechanism should (on the long term) stabilize the value of the Bitcoin; or any other coin based on this protocol.
Halving events have made the news because they were the main driver behind the ridiculous increases in price we have seen in past years.
Why?
Well, since miners know the halving time (remember – it’s just programmed in the network and the information is publicly available!) they increase their volume right before it. This will temporarily lower the coin price since new coins are issued relatively fast. When the halving happens, there is an instant drop in the number of coins available. This creates scarcity in the market and a motivation for investors to jump in, fueled by fear of missing out. This fear is also made much more tangible by the media massively focusing on it around halving events.
But this is not what will change the market in the coming months. Like I said, the Bitcoin halving event has already happened in 2020. The next one will be in 2024 (check the countdown here on Coin Market Cap) but before that, there’s an additional dynamic that made me even more enthusiastic about investing in the crypto market right now.
An Important Turning Point And Investment Strategy
Bitcoin miners have found themselves in a pretty though spot so far. Bitcoin hasn’t really had a good name in the investor community due to all the allegations around being the go-to currency for money laundering schemes and all sorts of illegal trafficking activities.
Without venture capital or any kind of fresh traditional investment capital coming in this market, miners have had to rely SOLELY on the BTC rewards!
In other words, miners have been using the (now) 6.25 BTC reward to pay salaries, operations, data centers, etc. and to scale their operations. Don’t forget that being every miner, there’s a whole company to be sustained!
I have seen that most of the mined Bitcoins where immediately put back into the market to provide miners with the liquidity they needed to run operations.
However…
And here, we are moving closer to what I think will be the turning point.
However, this situation is slowly changing as traditional investors are starting to step in. With more investment money flowing in on the balance sheets, the miners have close to no reason to sell their Bitcoins.
This movement is not mainstream yet, otherwise you’d hear it everywhere on the news, but you can see it in some little things happening in the market (if you know where to look) and especially on the miners’ balance sheets.
An example of these dynamics is the “Bitcoin Retention Program” just launched by Cipher Mining Technology which allowed them to increase their Bitcoin assets to 76%.
Looking at 2020-year reports, you see retention percentages going from 15% to 80% depending on the size of the individual miner.
Bottom line, here’s what I noticed:
- Mining corporations have access to traditional investment capital
- The fresh capital injection will allow miners to finance their operations
- If miners can finance their operations, they have almost no reasons to sell their Bitcoin rewards
- This, combined with the recurring halving events, will create scarcity and illiquidity in the market as more and more Bitcoins are safely kept in balance sheets
So, back to the original teaser question. What IS this alternative investment strategy in crypto currencies? How can you invest in crypto without buying any one of them?…
You invest in the mining corporations.
The Investment Strategy in a Nutshell: The Mining Corporations
And mining corporations are “just another one of those” stock listed companies you can analyse, valuate with “conventional” financial metrics. Check these two articles to get down to the numbers when looking at these companies: Owner Earnings Part 1 and Part 2.
I will be sharing more on this, talking about some mining corporations I find interesting, especially the ones at the forefront of sustainable mining (yeah, Elon was talking trash when he said that Bitcoin is heavy on the environment, it’s not that black and white after all).
One word of warning. As I have learned in my experience in the investment world so far, mentioning one of my mentors directly: when large, traditional institutional investors step into a market, it’s time to CASH OUT.
As these investors are slowly approaching the crypto market, being positioned correctly is very important. Do your work, invest what you can miss, and, most of all, don’t get greedy!
When you will read on the news that the stock exchange has hit a record numbers listing mining corporations, go check your position because it’ll most likely be time to cash. 😉
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Disclosure
These are unqualified opinions, and this newsletter, is meant for informational purposes only. It is not meant to serve as investment advice. Please consult with your investment, tax, or legal advisor, and do your own research.
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