A new theory on why the prices of crypto assets move as they do suggests we're on the verge of another major rally.
It comes from venture capital firm Andreessen Horowitz and says entrepreneurs have played a key role in the cyclical nature of crypto price rallies.
It differs from the usual analyses based on ratios or other mathematical theories to forecast where prices are going.
The report, released just last week, is entitled "The Crypto Price-Innovation Cycle." In it, authors Chris Dixon and Eddy Lazzari propose that each crypto rally has sown the seeds of the next rally by inspiring the creation of projects and startups that mature a few years later - in time to trigger the next big crypto asset rally.
That rally in turn draws in yet another fresh wave of innovators and entrepreneurs, restarting the cycle.
How the Crypto Price-Innovation Cycle Works
The first cycle, the report says, falls between 2009 and 2012. The first significant Bitcoin price spike was in July 2011. That drew the first innovators into the crypto fold.
"Entrepreneurs realized you could create businesses in crypto. This was when many of today's largest exchanges, miners, and wallets were founded," the report says. That gave early adopters ways to obtain and trade Bitcoin - tools that proved essential to the next big rally.
The second cycle falls between 2012 and 2016. The Bitcoin price peak here came in November 2013.
"This cycle brought roughly 10x more developers and startups into the space," the report says. "It was also when important projects were created and funded, most notably Ethereum, which drove a lot of the excitement in the third cycle in 2017."
The third cycle ran from 2016 through 2019. Bitcoin hit its all-time high in December 2017.
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"This cycle again increased the number of developers and startups in the space by another roughly 10x," Dixon and Lazzari write. "Crypto moved from the fringe to become a bona fide startup sector."
The report says many of the projects started since 2017 "are launching in the near future, possibly driving a fourth crypto cycle."
That implies another crypto asset rally is on the horizon. Let's dig a little deeper...
Digging Deeper into Why Crypto Assets Will Soar
To get the perspective of someone on the front lines of the world of crypto startups, I asked Cory Klippsten, founder and CEO of crypto startup Swan Bitcoin, for his thoughts on the Andreessen Horowitz theory.
"In tech circles, for people who have spent a lot of time in venture capital and in startups, say over the last decade or two, a lot of us were drawn in by the price rallies," Klippsten told Money Morning. "In my case it took the price noise of 2017 and Ethereum and the ICOs to draw in a lot of the people from my circles."
So we can check that box.
But Klippsten is less sure about whether fresh startups have driven subsequent price rallies.
"I don't think it's necessarily causing it. I think it's more of a correlation," he said. "But what certainly is true is that price action draws entrepreneurs and investors to the space, and many of them fall in love with it and stick around."
While the rise of new startups may not completely explain the cycle of crypto rallies, it does appear that they've contributed to them.
Probably the best example is the Ethereum project. It did jump-start the ICO (initial coin offering) craze that helped drive crypto prices to their all-time highs in late 2017 and early 2018.
The next cycle should get a similar boost from startups maturing now.
That's because the last crypto rally spawned a lot of companies focused on investing infrastructure.
Take Klippsten's company, Swan Bitcoin. Founded in 2019, it opened its virtual doors to customers at the end of March. Swan Bitcoin's business is automating Bitcoin investing with recurring purchases, with the dollars needed drawn directly from the customer's bank account.
In short, this startup makes investing in Bitcoin easier for retail investors. But many startups from the last few years have targeted investors with much deeper pockets.
This is the foundation of the next monster crypto rally...
The Building Blocks of the Next Crypto Price Rally
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I'm talking about institutional investors.
They're the ones with the vast amount of capital needed to drive crypto prices far beyond the previous all-time highs.
A few years ago, this group was very much on the sidelines. They were wary of the risk and, more importantly, lacked the proper infrastructure.
The last crypto rally created an incentive to solve that problem.
As recently as mid-January 2017, the collective value of all crypto assets was about $15 billion. Today, it stands at $250 billion (it peaked at about $819 billion in January 2018).
Crypto startups responded, and venture capital poured in to support them.
According to crypto data firm The Block, venture capital investment spiked from $37.81 million in 2017 to $435.5 million in 2018. It dropped off to $258.96 million last year but has surged to more than $400 million so far in 2020. That's a total of nearly $1.1 billion in less than three years.
With all that seed money, crypto infrastructure projects have bloomed.
The lion's share of this (nearly $500 million) has gone to Bakkt, the Bitcoin futures exchanges created by Intercontinental Exchange (ICE), parent of the New York Stock Exchange.
We've also seen the arrival of Bitcoin futures at exchanges like BitMex, Binance, and Huobi in addition to a veteran futures market, the CME.
Crypto lending has also exploded over the past few years, with the arrival of Celsius Network (2017), as well as lending services from Babel (2018), blockchain.com (2019), and BitGo (2020).
Genesis Capital, a sister company to Grayscale Investments, launched in 2018. In the first quarter of this year, it originated a record $2 billion of digital asset loans - double its earlier record of $1 billion set in the previous quarter.
Grayscale, which launched in 2013 during the previous cycle and is best known for its Grayscale Bitcoin Trust (OTCMKTS: GBTC), was busy expanding in the latest cycle. It has added nine crypto funds to its roster over the past couple of years.
These new funds give large investors a no-fuss way to gain exposure to such top cryptocurrencies as Ethereum, Litecoin, XRP, Stellar, and Zcash.
We're already seeing the impact of institutional investors on the older Bitcoin fund, with cumulative weekly inflows into GBTC rising from less than $100 million a year ago to more than $800 million as of March 31.
Other funds have launched outside the United States, such as last year's WisdomTree Bitcoin Fund (BTCW), which trades on the SIX Swiss Exchange.
The stage is set for the next big crypto asset rally. And as usual, Bitcoin will lead the way. With billions of dollars flowing into crypto, I expect the price of Bitcoin to reach $100,000 by the end of 2021.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.