The first law of thermodynamics states that energy can neither be created nor destroyed, only altered in form – this same law can be applied to investing, where risk and return are never created or destroyed, just transformed. As the various structural risks of crypto investing change over time, the opportunities for returns change as well.
Once upon a time, when Bitcoin (BTC) came to life, there were many risks. Existential risk was one of the first, as it was not clear if Bitcoin was going to make it. As the market reduced its assessment of this risk, the value of Bitcoin rose, finding a new price equilibrium. Financial/funding risk was another risk, as it was unclear if enough capital would be mobilized into this asset class. This risk was ultimately reduced by massive inflows of venture capital, and the price jumped once more.
Currently, regulatory risk is the next domino to fall. As this risk is reduced, the landscape for digital alpha investing is continually transforming. This transformation creates an allocator’s dilemma, as investors can’t just offhandedly invest with the largest funds as a sure-fire path to success. Instead, smaller funds have a unique opportunity to outperform.