After a period where early adopters enjoyed enormous gains from cryptocurrencies, money managers, now knowing this isn't a fad but a significant trend, are starting to launch hedge funds that target the sector.
To understand how quickly this is happening, at the end of 2016 there were 26 hedge funds focusing on cryptocurrencies. Since August 29 of this year the number has doubled from 55.
This is going to add more fuel to the cryptocurrency fire, and will be a strong catalyst to accelerate the growth of the market, even beyond what it has already performed.
Not only are investors not too late, they're really getting in at just the right time when measuring risk versus reward. In the past there was a lot of unknowns that made investment in Bitcoin and other cryptocurrencies extremely risky.
Even now, the majority of the over 1,000 cryptocurrencies available will fail. But as the market continues to slowly mature, there are some cryptocurrencies that are showing signs of sustainability.
But when you consider it doesn't take a lot of money to generate some extraordinary returns, the reward far exceeds the risk, unless someone gets too greedy and invests money they can't afford to lose.
Understanding the cycles of new markets
If you have studied business or economic history, you'll know that a new product or service goes through a visible cycle that can be counted on to recur over and over again; it's guaranteed. I'm talking about products and services that gain traction, not those that never get off the ground or are fads.
Here's how the cycle works. You start with the early adopters, and news starts to emerge that they have made amazing gains in a relatively short period of time. This attracts the attention of other wealthy people or money managers. That's where were things are now at in the cryptocurrency market.
When the so-called smart money starts to get in on the action, any market will start to rapidly grow, bringing even more upward impetus to it. While some have made a lot of the early money, at this stage there's still a lot of money to be made, as the market recognizes the validity of the product or service and want a piece of the action.
In the case of cryptocurrencies, since there are opportunities for new coins to focus on specific market demands, there will be just as many opportunities to generate returns we may see only once in a lifetime, as there was in the recent past.
When this starts to happen, what comes next is the person on the street starts to get wind of the potential to generate meaningful wealth in the sector. We aren't at that stage yet, as a lot of things will have to be developed to make the industry safer and more palatable to the general population.
At that time we will see even more extraordinary growth as people move from the sidelines, and plow their cash into cryptocurrencies.
I think what will eventually trigger that will be when ways to invest in the sector that are understood by the average person on the street are developed. In the U.S., that almost certainly means allowing ETFs to be designed that target the blockchain.
My thought there is it'll probably happen sometime in the middle of 2018. If not by then, it shouldn't be too long afterward.
Mass investment coming - but not yet
While I do believe the majority of regular people will jump into the sector when ETFs are offered, I don't think that will immediately trigger massive investment.
I think many investors, for one, won't understand or possibly, not even have heard about the potential of this market. What some of us that follow markets need to know is we tend to forget that most people aren't familiar which that we follow or read about on a daily basis. That is without a doubt what is happening right now.
Some of my own research concludes that there are a lot of people that haven't even heard of Bitcoin or know what it is, let alone the more exotic label of cryptocurrencies.
What's important to consider is we still have time to get in even if hedge funds are popping up everywhere. They still need to get a grasp of the market, and that will take a little time. What's most important now is cryptos are increasingly becoming a major part of the financial news cycle. This will trigger a lot more interest and investment.
Once it transitions from the financial news cycle to the regular news cycle, that's when retail investors will start to look a lot closer at taking a position in the sector. At that time massive amounts of money will be flowing into the sector.
I'm not going to get into direct investment in specific cryptocurrencies in this article. Instead, I want to focus on publicly traded companies that are easier to understand.
Among the more interesting are Overstock (OSTK), which I recently wrote up, Bitcoin Investment Trust (OTCQX:GBTC), HIVE Blockchain Technologies Ltd. (PRELF), and Global Blockchain Technologies Corp. (OTCPK:BLKCF).
There are others, but these are the ones I see as having a lot of upside with less risk than others. They will still include a lot of volatility that goes along with this sector.
I want to focus on HIVE Blockchain Technologies Ltd., and Global Blockchain Technologies Corp., both of which I have a position in.
Global Blockchain Technologies Corp. self-identifies as "an investment company providing investors access to a basket of holdings within the blockchain space, managed by a team of industry pioneers and early adopters of all major cryptocurrencies."
While the purpose of the company aligns with what I'm looking for, what made me take a position in it was the team it has in place, as well as being listed on several exchanges at this time.
The team includes Jim Rogers, Rik Willard, Jeff Pulver and Steven Nerayoff, among others. There are few, if any other companies that have that type of talent lined up in this sector.
Based in Canada, HIVE Blockchain Technologies Ltd. says it "operates as a cryptocurrency mining firm. The company focuses on building a bridge from the blockchain sector to traditional capital markets. It mines multiple cryptocurrencies, such as Ethereum, Monero, and ZCash."
Recently the company said it closed a "bought deal private placement" valued at $30 million, with underwriters getting 6 percent of the total. That capital will be used to acquire its second data center; this one located in Reykjanes, Iceland. It will boost its cryptocurrency mining capacity by over 70 percent
Also recently secured for general business purposes was "non-brokered private placement of 4,666,667 common shares at C$1.50 per common share for gross proceeds of $7,000,000."
The primary attractiveness of HIVE Blockchain Technologies Ltd. is it has little in the way of competition.
Where the risk is will be when the U.S. inevitably gives the green light to allow cryptocurrency ETFs to be offered to investors.
The good news is by the time that happens, it could give shareholders some nice returns. After that, depending on how the U.S. market emerges, it'll have to show how it differentiates from its peers.
These companies and others to come offer tremendous upside for investors, with the tremendous risk associated with the market in its early stages slowly shrinking.
Hedge funds are going to drive the industry well into next year, and depending at which stage retail investors get comfortable with taking a position, they will add to the impetus of the crypto sector, pushing the value of the blockchain, cryptocurrencies, and publicly traded companies and instruments to very high levels.
This is the historical pattern with all market segments, and the winners will make a lot of people wealthy, or at least increase their net worth significantly.
The key is to not listen to those suggesting the best part of this market has been missed. We're still in the early stages of growth, and hedge funds are going to take it to a very high level, and once retail investors get in, it's going to skyrocket.
What needs to be done if you're interested in this sector is to educate yourself and not take too long to get in. Once the general public learns about this and responds, there will be little in the way of a good starting point that can generate a lot of gains.
There is no need to panic, only to understand the time to get in will be as more hedge funds and managed money invest in crytocurrencies. If we wait until the public starts taking positions, most of the low-lying fruit will be long gone.
At that time the risk will start to increase as it really does turn into a bubble. We're not close to being in that place at this time.
Disclosure: I am/we are long PRELF, BLKCF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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