Sometimes investors are reluctant to buy assets that have had risen significantly in price.
Take bitcoin… it rose from a low of under US$3,300 to US$9,000 from December 2018 to May 2019.
That massive rally has given many investors pause. But if you haven’t invested in bitcoin yet, you’re running out of time.
As I’ll explain today, Wall Street is coming to the crypto space. And there won’t be enough bitcoin to go around.
This will send prices soaring faster than anyone expects…
Wall Street is coming
Just about every big bank on Wall Street is working on a way to enter the cryptocurrency space. The most visible of these is the upcoming bitcoin exchange Bakkt.
Created by the team that operates the New York Stock Exchange (NYSE) – Intercontinental Exchange (ICE) – it could launch as soon as this quarter. It’s exactly what the cryptocurrency space needs.
Finally, Wall Street money managers will have a place to buy and store bitcoin that’s as trusted and secure as the NYSE itself.
As soon as it launches, massive amounts of money could start flowing through it. For a lot of institutional (or big money) investors, this will be the first time they can safely and easily buy bitcoin.
And Bakkt is only the beginning.
Asset manager Fidelity, which has US$2.5 trillion under management, is working on a similar platform. Meanwhile, investment bank Goldman Sachs has partnered with BitGo (a blockchain security company)… and Japanese investment bank Nomura has partnered with Ledger, which makes hardware to protect cryptos. Several stock exchanges will soon offer crypto trading, too, including TDAmeritrade and E*Trade.
In short, trillions of dollars are headed for the crypto space. This will push prices up rapidly.
But I believe they’ll climb faster than anyone expects because of one big bitcoin misconception.
What investors get wrong about crypto prices
You’ve likely heard the term “market capitalization.”
Stock investors rely on market capitalizations for a quick check of the size of a company. (Market cap is the total dollar market value of a company’s outstanding shares.) Bigger companies have been around longer and may be more successful.
It’s a useful, if basic, parameter for crypto investors too.
It’s very easy to calculate market cap of a crypto: multiply the current price by the supply of coins or tokens in the market. However, that measurement may turn out differently based on who is doing the calculation.
Generally, when we talk about market cap, we’re discussing the price of the token multiplied by the circulating supply of the token. “Circulating supply” is the total supply of tokens currently available to the market. Price is determined by looking at real-time data from many different crypto exchanges.
Circulating supply is difficult to determine because most cryptos are designed to continuously issue new tokens or coins on a routine basis.
For example, the bitcoin network rewards miners with 1,800 newly created bitcoin every day.
But the big reason circulating supply is hard to calculate is because even though most cryptos are on public ledgers (which means that anyone can track them), there’s no easy way to determine how many cryptos are truly circulating.
The problem with “circulating supply”
Because bitcoin has a fixed supply, there will only ever be 21 million mined. Right now, there are over 17 million bitcoin in existence.
So let’s say two investors each bought one bitcoin a few years ago. One of the investors plans to hold onto his bitcoin as a long-term investment. His bitcoin is safely tucked away into a cold wallet, and he won’t sell or spend it for a very long time – if ever.
The other investor is careless and loses his private key. So he can no longer access his bitcoin. In other words, he can’t sell it or spend it, even if he wanted to.
According to the CoinMarketCap.com website – the most popular place for crypto investors to get information – the circulating supply of bitcoin includes the holdings of both of these investors. After all, there’s not a great way to determine who can still access their bitcoin and who can’t.
This is important because we’re not just talking about two investors. We’re talking about potentially millions of coins worth billions of dollars.
Around five million bitcoin are in the hands of investors who have no intention of ever selling.
Another nearly four million bitcoin have been lost, according to software company Chainalysis.
They were put into safes where someone lost their passwords, or they lost their wallets or laptops completely. There’s no recovering from this.
That’s nine million bitcoin altogether. That works out to be over half of the 17 million bitcoin that have ever been mined.
But these are still included in the “circulating supply,” and the market cap calculation is based on that.
That means the calculations are misleading, considering that many of those tokens are likely lost forever.
Bitcoin prices are headed higher
The crypto space is working on different ways to take this into account. But it has to figure out a new way to calculate market cap that would be accepted as reasonable by investors.
Just to be clear, this would have no effect at all on the underlying technology and development of the cryptos.
But what would investors do if they suddenly realized there were half as many bitcoin available than they previously thought?
One possible reaction would be to buy bitcoin as these coins become scarcer – sparking a rally in the crypto space. That could happen as this knowledge spreads.
And no matter whether the circulating supply of bitcoin is 17 million or nine million… Wall Street is investing in the crypto industry. Very soon, crypto will see a flood of new investors, and there won’t be enough bitcoin to go around.
So if you haven’t invested yet, now is the time.
Lead Crypto Analyst