The Logic of Penetration Rate and Institutional Investors' Crypto Strategies

From Internet Investment to All in Crypto

An internet VC who previously worked at Huaxing Capital, Qiming Venture Partners, and a family office first encountered cryptocurrency during the ICO boom in 2017. At that time, his understanding of the field was still at the stage of "it might be a scam," so he just made a small profit and exited.

In 2020, he delved deeper into Crypto and was attracted by the view that "Bitcoin is a high-quality asset for the long term." The logic behind this view is based on a comparison of penetration rates: when Alibaba went public, China's e-commerce penetration rate was 3%, which grew to 30% ten years later. At that time, the global user penetration rate of Crypto was only 100-200 million people, compared to a global population of 6 billion, indicating a huge potential for growth.

In 2023, this investor established his own fund NDV. He entered the market when Bitcoin was around $29,000, and after approximately 20 months, he achieved a return of over 4.3 times, outperforming BTC.

Investment Strategy: Institutional Penetration Rate

After founding the fund, he always followed the investment logic of "institutional penetration rate". In 2023, they mainly invested in GBTC, gaining excess returns by taking advantage of its discount to Bitcoin.

With the disappearance of discounts after the approval of the ETF, he began to consider the next investment direction for institutional investors after purchasing Bitcoin ETFs. He believes that Crypto-related stocks may become the new focus for institutional investors.

After screening, they ultimately chose MSTR (MicroStrategy) as their investment target. The reason for selecting MSTR lies in its simple logic and ease of forming consensus, especially for investors who are new to Crypto. In contrast, companies like Coinbase that require in-depth analysis of fundamentals, as well as mining stocks that can easily distract investors, are not as attractive as MSTR.

It has been proven that MSTR's performance indeed outperforms several popular investment targets such as NVIDIA and Bitcoin.

Concerns of Institutional Investors

In the view of this investor, "large funds" include sovereign wealth funds, insurance companies, university endowments, charitable foundations, and various hedge funds. Currently, the investment penetration rate of these institutions in the crypto space may be less than one-thousandth.

Institutional investors value simplicity and high liquidity the most. Therefore, their investment choices at this stage are mainly limited to Bitcoin or a few related stocks, and the stocks with better liquidity are more likely to reach consensus, as large funds need to consider the convenience of entering and exiting.

His investment logic is very simple: seek assets that are easy to reach consensus on and have good liquidity, because these are the places most likely to attract large capital inflows.

Judging the Top of the Bull Market

This investor believes that since the issuance of ETFs, Bitcoin has risen from $40,000 to around $100,000, with $30-50 billion flowing into the market. To push the price of Bitcoin to $150,000, at least an equal scale of funds inflow is needed.

He analyzes that it is unlikely for the Federal Reserve or the Treasury to invest such a large amount of funds in the short term. The main "big buyers" currently visible may be state governments, and if each major state invests $2 billion, the total investment from 50 states could reach $50-100 billion.

Based on this analysis, he expects the top price of Bitcoin to be around $150,000.

Changes in Market Cycles

Regarding future market changes, this investor believes that cycles will still exist, but they will no longer be strictly every four years. He expects that as long-term capital enters, the market will gradually become more like the US stock market, and various cryptocurrencies will gradually form their own independent narratives and trends, no longer rising and falling in sync with Bitcoin.

He predicts that in the future, what constitutes a token may be redefined, allowing for token dividends, buybacks, and more. This will make the cryptocurrency market more akin to the U.S. stock market, exhibiting characteristics of the strong getting stronger, rather than the sector rotation seen in the A-share market.

Strategies for Selecting Small Tokens

For trading altcoins, this investor has a simple selection principle: only choose tokens from founders he knows under the prevailing trend. He believes that as long as the founder continues to work instead of cashing out in the short term, the most an investor loses is just the opportunity cost.

When evaluating founders, he particularly focuses on the trait of "high growth potential." Whether they are passionate salespeople or diligent doers, as long as the founder is continuously growing, able to consistently bring new insights and take practical actions, he considers them a good founder.

Ways to Keep Improving

This investor believes that the key to maintaining progress is to learn to honestly face one's own mistakes. He recommends reading "The Road Less Traveled," a book that taught him how to properly confront his own errors.

In terms of trading, he suggests constantly improving through practice, iteration, and review. An effective but challenging method is to record the reasons for each trade, continuously accumulate and review.

Finally, he suggested paying attention to some excellent traders, learning their mindset and trading strategies, while also recognizing one's own strengths and maximizing those strengths.