Author: Crypto Rookies, Medium; Translator: Song Xue, Golden Finance

1. Introduction

Every past crypto bull run has demonstrated a rotation of capital between various crypto assets. Typically, funds move from stablecoins to Bitcoin, then to Ethereum and other large layer 1 protocols, and then to various mid- and low-cap altcoins. However, this is true in a crypto market dominated by retail investors who act in a way that wants to get rich quick and expect a Lamborghini after investing $500 in a crazy meme coin. The upcoming bull run will see a new player with deep pockets enter the market, namely institutional investors who think very differently. It is foreseeable that capital rotation in the crypto market will no longer behave as it did in the previous standards. SEC-compliant crypto assets may outperform other crypto assets.

Figure 1. Capital rotation in the crypto industry

2. Retail Investors and Capital Rotation

Institutional investors have not been involved in the crypto industry before, however, with Bitcoin and Ethereum ETFs about to receive SEC approval, we will see a completely different group of players in the industry, and common understandings of fund rotation may no longer apply.

The crypto industry attracts speculators seeking 1,000% monthly returns. At each level of capital rotation, billions of dollars of buying pressure can drive Bitcoin up 500%, and the capital gains from Bitcoin's growth will then flow to Ethereum, which has a market cap of only one-third of Bitcoin, pushing its price up 1,000%. From there, the capital gains from ETH's growth will be dispersed to small, medium and low-cap crypto projects, which often see crazy returns due to their high volatility and smaller capital available in the liquidity pools of decentralized exchanges and market makers that support trading on centralized exchanges. It is common to see growth rates of 10,000% for such new tokens and low-cap crypto assets.

There are two main reasons for this rotation: 1) When Bitcoin investors believe that the market is about to fall, they choose to cash out some profits and reinvest in smaller projects that have not yet grown significantly. 2) Investors realize they can’t get rich quickly on Bitcoin, and they choose to look for alternative high-risk investments. At the same time, they also get a taste of Bitcoin as a gateway drug, and now they want to diversify their capital while they are invincible. change.

Regardless, capital rotation has occurred during at least the last two cryptocurrency bull runs, and most analysts still expect it to happen during the upcoming 2024 and 2025 bull runs as well.

3. Institutional Investor Attitude

With the upcoming approval of crypto ETFs, institutional investors are likely to pour a lot of capital into the market, and currently only Bitcoin and Ethereum are expected to become full-fledged ETFs, so these funds will flow into these two assets. I expect Solana to be applied for an ETF soon, but the possibility of other assets becoming ETFs is much smaller, so institutional investors will be able to invest in these ETFs but will not be able to rotate their capital into other crypto industries. The reason is that institutional investors behave differently, they have a responsibility to protect investors' capital, and they need to follow certain rules. For example, asset managers can allocate funds for assets that are available directly on the brokerage platform without seeking permission from their superiors, but even if they want, they cannot allocate funds for other assets without permission. Therefore, ETFs and their availability on brokerage platforms allow asset managers who want to gain exposure to the crypto industry to trade them easily.

The impact of this scenario is that small and mid-cap crypto assets may no longer perform as well as they once did, which could lead investors to realize that rather than rotating capital into the small and mid-cap markets, investing in BTC/ETH offers better returns, thereby diverting capital away from small and mid-cap markets and brand new tokens. We often see this happen in the traditional stock market, where the large-cap mythical seven stocks (Apple, Microsoft, Nvidia, etc.) grow faster than the smaller-cap tech stocks as more and more money is concentrated in the winners until a massive crash occurs. After all, investors seek the best returns on their investments, and if Bitcoin/Ethereum starts to show consistent 20%-30% monthly growth, why sell it to reallocate capital into the small and mid-cap markets? After all, higher risk investments need to offer higher returns, but with so much capital trapped and forced to stay in ETFs and SEC-compliant crypto assets, returns may be skewed relative to markets traded only by retail investors.

Given that the high-cap crypto markets have leveraged opportunities, while newer crypto assets and lower-cap crypto assets do not, I think it is entirely possible to generate more returns by simply holding on to BTC/ETH/SOL this time around.

4. Crypto assets that meet SEC requirements

Since institutional investors can only invest in SEC compliant assets and need to easily utilize the usual tools of brokerage firms like leverage, derivatives, options… then ETFs are the real way to go. We can expect a slew of new crypto assets seeking full compliance to gain access to these deep pockets. These SEC compliant low market cap assets should benefit from a massive growth potential that we have never experienced before as there won’t be many of them in the market and capital will likely be concentrated towards them. Asset managers may not be able to allocate capital to these assets until they reach a scale where they can be used on brokerage platforms, but we may see innovative investment groups backing these assets to get them listed. Therefore, a whole new narrative may emerge, but it may take another bull cycle (2028-2029) to fully materialize.

V. Conclusion

There are two major players in the crypto industry in the upcoming bull run, one of which was absent in the last bull run, and that is the institutional investors with large amounts of capital and very sophisticated investment strategies. Retail/crazy investors simply cannot compete in this round, and the standard capital rotation will likely be broken, which is a huge opportunity in itself. While this is by no means investment advice, I personally believe that crazy investors will profit from the capital gains in Bitcoin and Ethereum, put this capital into small and medium-cap crypto assets, only to find that they do not perform as well as they could have achieved by holding BTC/ETH/SOL, and will then continue to return to these three, which will drive another massive rally and concentration of capital into very few assets. Meanwhile, the lower market cap moves may not experience the craziness that usually occurs in 10,000%+ gains, and the gains may be short-lived, quickly dry up, and capital will flow back. All of this will benefit the institutional investors to a greater extent, who will profit from the less sophisticated investors.

Finally, if newly created crypto startups successfully achieve full compliance with the SEC to launch low-cap assets and are able to easily provide convenient access to institutional investors, they should experience explosive growth in intense growth potential (we may only see a few of them in the upcoming bull market, but it should become a narrative in the longer term). Imagine the growth we usually see in newly created crypto projects, 100,000% growth in a year in a bull market, and that is when thousands of competing projects are also attracting capital, and in this case, we can expect very few projects to be registered and approved by the SEC, making the entire market value these projects far more than their non-SEC compliant peers.