Disclaimer: The information in this blog represents the opinions of its author and is for educational purposes only. It is not intended as investment advice. Cryptocurrency markets are extremely risky so you should only invest money you are willing to lose.
From Dark Web To The Light of Wall Street
If you were like most people a year ago, the mere mention of bitcoin and other cryptocurrencies (altcoins) probably evoked images of hackers, pirates, and the dark web. Wow, what a difference a year can make.
I remember just a few short months ago having to scour obscure blogs and reddit threads to find the latest cryptocurrency news - Kaboom! Now it pops up every day on CNBC, The New York Times, and The Wall Street Journal. An episode of "The Big Bang Theory", one of the most popular sitcoms in history with an average of 17 million viewers, will be entirely devoted to bitcoin. "The Bitcoin Entanglement" will air on Nov. 30th.
A Thousand Deaths
Wall Street bankers and the media have written bitcoin's obituary so many times that you would think bitcoin had died a thousand deaths. In defiance of all these morbid predictions, cryptocurrencies have not only stayed alive but they've gone mainstream - with the media and financial analysts' rhetoric quickly morphing from "fraud" and "bubble" to "revolutionary new asset class".
A Tsunami Of Cash
As a result of this mainstreaming, a tsunami of cash is headed for the cryptocurrency markets. Wall Street banks are literally tripping over themselves to be the first to directly trade cryptocurrencies and the world's largest futures exchange, The Chicago Mercantile Exchange ("The Merc") will introduce a bitcoin futures contract this year.
Once a futures market is established, Exchange Traded Funds will soon follow, allowing any investor to add cryptocurrencies to their traditional investment portfolio. We can see this as nearly a fait accompli judging by the SEC's language in a ruling rejecting an ETF proposed by the Chicago Board Options Exchange and digital asset exchange Gemini.
The SEC cited the lack of "surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. According to a Merrill Lynch report, that problem would be addressed by a futures contract: "The ETF and futures contract do not depend on each other, but clearly, they would be reinforcing".
Get Ahead of Wall Street
Judging by the number of new wallets opened on coinbase in the past month, individual investors aren't waiting for the green light from Wall Street - they're taking the initiative to dive into the cryptocurrency markets head first all on their own. So here's a strategy for the individual investor to get the jump on Wall Street.
Finding The Next Bitcoin
The big banks and old-school exchanges are barely prepared to trade bitcoin for dollars, while smart investors in the cryptocurrency space are following fundamental and technical analysis along with cross-currency exchange rates to try to find the next bitcoin - the next cryptocurrency that will skyrocket. By the time Wall Street catches up the explosive move will probably be over.
Following The Money
Here's a real world example of following the money flow between cryptocurrencies to set up a big winning trade in the altcoin markets (trading between different cryptocurrencies).
Strategy #1 would have been to recognize exactly what the dispute was about - in this case it was block size. The bitcoin network was outgrowing its 1Mb block size, leading to a transaction backlog. The 2x upgrade would have doubled the block size, but there was disagreement in the community about whether this strategy would preserve bitcoin's network as a truly distributed ledger.
It's a simple fact that as blocks get bigger, fewer and fewer people have the resources to run full nodes. When this number gets small enough, it loses its unique identity as a distributed network and it becomes just another network of redundant nodes.
Which Altcoins Will Benefit?
Strategy #2 would be to identify other altcoins whose blockchain architecture was already addressing the block size issue in a way that made transactions speedier. Bitcoin cash, which forked off of the bitcoin blockchain in August, has an 8Mb block size, and Dash is in the process of implementing 2Mb blocks. These altcoins could have easily been identified as potential beneficiaries of the lack of consensus over bitcoin block size.
Double Your Money, Then Double Again
Strategy #3 would be to simply follow the money. In this case there was a delay of a few days but closely watching the markets would have enabled you to see the momentum accumulating in bitcoin cash and in dash. It turns out this would have been an astonishingly profitable trading opportunity as bitcoin cash doubled overnight and then doubled again, rising from a low of about $600 on Nov 8th to a high of $2500 on Nov. 11th!
The spike in the value of dash came a bit later, first at 10AM on Nov. 12th then again at 6PM, but if you had been ready for it you could have jumped on that one too.
No Magic or Math Required
None of this is magic, or even sophisticated math. It is simply knowledge of the fundamentals of particular altcoins applied to a given market scenario combined with close observation of the money flow between altcoins.
With a tsunami of cash headed into the cryptocurrency markets, there will be plenty of opportunities for the smart, nimble investor to stay ahead of Wall Street. Watch the markets, figure out which altcoins are likely beneficiaries of a given scenario, then watch the money flow. All it will take is a basic understanding of the fundamentals of altcoins and a willingness to stay calm and rational and simply follow the money.